**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

**FORM 10-K**

**ANNUAL REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For thefiscal year ended December 31, 2006**

**Commissionfile number 000-50645**

**THE BANK HOLDINGS**

(Exact name of Registrant as specified in its charter)

| **NEVADA**              |                                                         | **90-0071778**                                   |
|-------------------------|--------------------------------------------------------------|--------------------------------------------------|
| State of  Incorporation |                                                         | IRS Employer  Identification No                  |
|                    |                                                         |                                             |
|                    | Address of  principal executive offices:                     | **9990  Double R Boulevard, Reno, Nevada 89521** |
|                    |                                                         | ** **                                       |
|                    | Registrant’s  telephone number, including area code:    | **775-853-8600**                                 |
|                    |                                                         | ** **                                       |
|                    | Securities  registered pursuant to Section 12(b) of the Act: | **Common  Stock, $0.01 Par Value**               |
|                    | Securities  registered pursuant to Section 12(g) of the Act: | **Not Applicable**                               |
|                    | Name of Each  Exchange on Which Registered:                  | **NASDAQ  Small Capital Markets**                |
|                         |                                                              |                                                  |  |  |

 

Indicated by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.  Yes  o     Nox

Indicated by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act. Yes  o     Nox

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.  Yes    x No****o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-B is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis form 10-K.  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.  (CheckOne)

LargeAccelerated filer o           Acceleratedfiler o           Non-acceleratedfiler  x

Indicate by check mark whether the registrant is aShell Company (as defined in Rule 12b-2 of the Act)

Yes o   No  x

For the year endingDecember 31, 2006 the Registrant’s revenues were $32,721,000.  As of March 21, 2007, the aggregate marketvalue of the voting stock held by non – affiliates of the Registrant wasapproximately $83.0 million based on the NASDAQ closing price on that date of$18.60 per share.

Shares of CommonStock held by each officer and director and each person owning more than fivepercent of the outstanding Common Stock have been excluded in that such personsmay be deemed to be affiliates.  This determinationof the affiliate status is not necessarily a conclusive determination for otherpurposes.  The number of shares of CommonStock of the registrant outstanding as of March 21, 2007 was 5,831,099 parvalue $0.01.

**DocumentsIncorporated by Reference:**

Portions of thedefinitive proxy statement for the 2007 Annual Meeting of Shareholders to befiled with Securities and Exchange Commission pursuant to SEC Regulation 14Aare incorporated by reference in Part III, Items 10-14.

 

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TABLEOF CONTENTS
| **Part I**     | ** ** | ** **                                                                                       |   |   |
|----------------|------------|--------------------------------------------------------------------------------------------------|--------|--------|
| ** **     | ** ** | ** **                                                                                       |   |   |
| Item 1.        |       | Description  of Business                                                                         |   |   |
|           |       |                                                                                             |   |   |
| Item 1A.       |       | Risk  Factors                                                                                    |   |   |
|           |       |                                                                                             |   |   |
| Item 1B.       |       | Unresolved  Staff Comments                                                                       |   |   |
|           |       |                                                                                             |   |   |
| Item 2.        |       | Description  of Properties                                                                       |   |   |
|           |       |                                                                                             |   |   |
| Item 3.        |       | Legal Proceedings                                                                                |   |   |
|           |       |                                                                                             |   |   |
| Item 4.        |       | Submission  of Matters to a Vote of Security Holders                                             |   |   |
|           |       |                                                                                             |   |   |
| **Part II**    | ** ** | ** **                                                                                       |   |   |
| ** **     | ** ** | ** **                                                                                       |   |   |
| Item 5.        |       | Market for  Common Equity and Related Shareholder Matters                                        |   |   |
|           |       |                                                                                             |   |   |
| Item 6.        |       | Selected  Financial Data                                                                         |   |   |
|           |       |                                                                                             |   |   |
| Item 7.        |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |   |   |
|           |       |                                                                                             |   |   |
| Item 7A.       |       | Quantitative  and Qualitative Disclosures about Market Risk                                      |   |   |
|           |       |                                                                                             |   |   |
| Item 8.        |       | Consolidated  Financial Statements                                                               |   |   |
|           |       |                                                                                             |   |   |
| Item 9.        |       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure            |   |   |
|           |       |                                                                                             |   |   |
| Item 9A.       |       | Controls and  Procedures                                                                         |   |   |
|           |       |                                                                                             |   |   |
| Item 9B.       |       | Other Information                                                                                |   |   |
|           |       |                                                                                             |   |   |
| **Part  III**  | ** ** | ** **                                                                                       |   |   |
| ** **     | ** ** | ** **                                                                                       |   |   |
| Item 10.       |       | Directors  and Executive Officers of the Registrant and Corporate Governance                     |   |   |
|           |       |                                                                                             |   |   |
| Item 11.       |       | Executive  Compensation                                                                          |   |   |
|           |       |                                                                                             |   |   |
| Item 12.       |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   |   |
|           |       |                                                                                             |   |   |
| Item 13.       |       | Certain  Relationships and Related Transactions and Director Independence                        |   |   |
|           |       |                                                                                             |   |   |
| Item 14.       |       | Principal  Accounting Fees and Services                                                          |   |   |
|           |       |                                                                                             |   |   |
| **Part IV**    |       |                                                                                             |   |   |
| ** **     |       |                                                                                             |   |   |
| Item 15.       |       | Exhibits,  Financial Statement Schedules                                                         |   |   |
|           |       |                                                                                             |   |   |
| **Signatures** | ** ** | ** **                                                                                       |   |   |
| ** **     | ** ** | ** **                                                                                       |   |   |
| **Appendix**   | ** ** | ** **                                                                                       |   |   |

 

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**PART I**

This Annual Report and Form 10-K may be deemed to include forwardlooking statements, which management believes are a benefit toshareholders.  These forward lookingstatements describe management’s expectations regarding future events anddevelopments such as future operating results, growth in loans and deposits,continued success of the Company’s style of banking and providing financialservices and the strength of the local economies.  The word “will,” “believe,” “expect,”“should,” and “anticipate” and words of similar construction are intended inpart to help identify forward looking statements.  Future events are difficult to predict, andthe expectations described above are subject to risk and uncertainty that maycause actual results to differ materially and adversely.  In addition to discussions about risks anduncertainties set forth from time to time in the Company’s filings with theSecurities and Exchange Commission (“SEC”), factors that may cause actualresults to differ materially from those contemplated by such forward lookingstatements include, among other, the following possibilities:  (1) local, national, and internationaleconomic conditions are less favorable than expected or have a more direct andpronounced effect on the Company than expected and adversely affect theCompany’s ability to continue its internal growth at historical rates andmaintain the quality of its earning assets; (2) changes in interest rates reduce interest margins more than expectedand negatively affect funding sources; (3) projected business increases following strategic expansion oropening or acquiring new branches are lower than expected; (4) costs ordifficulties related to the integration of acquisitions are greater thanexpected; (5) competitive pressure among financial institutions increasessignificantly; (6) legislation or regulatory requirements or changes adverselyaffect the businesses in which the Company is engaged; and (7) the Company’sinability to realize the efficiencies it expects to receive from itsinvestments in personnel and infrastructure.

**ITEM 1.     BUSINESS**

**The Company**

**The Bank Holdings**

TheBank Holdings is a bank holding company incorporated in Nevada on January 17,2003 and registered under the Bank Holding Company Act of 1956, asamended.  We conduct banking operationsthrough our principal subsidiary, Nevada Security Bank, a Nevadastate-chartered commercial bank.  We andNevada Security Bank are both headquartered in Reno, Nevada at 9990 Double RBoulevard.  We acquired all of theoutstanding shares of Nevada Security Bank on August 29, 2003.  On November 6, 2006, the Company acquiredthrough merger NNB Holdings, Inc. in Reno, Nevada and its subsidiary bankNorthern Nevada Bank whose branches became part of Nevada Security Bank.

Duringthe first quarter of 2006, the Company acquired two qualified intermediarycompanies, Rocky Mountain Exchange (formerly known as Big Sky PropertyExchange) and 75% of Granite Exchange, Inc. which facilitate tax-deferred realestate transactions under Section 1031 of the Internal Revenue Code.  Rocky Mountain Exchange is located in BozemanMontana, and Granite Exchange is headquartered in Roseville, California and hasother sales offices in Hawaii and Las Vegas, Nevada.  Qualified intermediaries select the financialinstitution to hold depositor accounts created as part of the exchangetransactions.  The exchange balancesdeposited into the Bank should increase the Bank’s core deposits, decrease theBank’s loan to deposit ratio, and support future loan growth.  These subsidiaries have been consolidated onthe Company’s books.

TheCompany’s other direct subsidiaries are The Bank Holdings Statutory Trust I, aConnecticut statutory trust which was formed in November, 2005 solely tofacilitate the issuance of variable rate capital trust pass through securitiesand NNB Holdings Statutory Trust I which was formed in June 2005 as asubsidiary of NNB Holdings, Inc., and was acquired by the Company in the mergerwith NNB Holdings, Inc.  NNB HoldingsStatutory Trust I is a Delaware Statutory Trust also formed to facilitate theissuance of capital trust pass through securities.  The additional regulatory capital generatedthrough the securities has enabled the Company to 

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followpreviously established expansion plans without an impairment of risk-basedcapital ratios.  Pursuant to FASBInterpretation No. 46 *Consolidation of VariableInterest Entities*(FIN 46),**The BankHoldings Statutory Trust**I and NNBHoldings Statutory Trust I are not reflected on a consolidated basis in thefinancial statements of the Company.

TheBank Holdings has twelve full-time employees who are not also employees ofNevada Security Bank.  The Company existsprimarily for the purpose of holding the stock of the Bank and of other suchsubsidiaries it may acquire or establish. References herein to the “Company” include the Company and itsconsolidated subsidiaries, unless the context indicates otherwise.

TheCompany’s stock is traded on the NASDAQ Stock Market under the symbol TBHS, andas such the Company is subject to NASDAQ rules and regulations including thoserelated to corporate governance.  TheCompany is also subject to the periodic reporting requirements of Section 13 ofthe Securities Exchange Act of 1934 (the “Exchange Act”) which requires theCompany to file annual, quarterly and other current reports with the Securitiesand Exchange Commission (the “SEC”).  TheCompany is subject to additional regulations including, but not limited to, theproxy and tender offer rules promulgated by the SEC under Sections 13 and 14 ofthe Exchange Act; the reporting requirements of directors, executive officersand principal shareholders regarding transactions in the Company’s common stockand short-swing profits rules promulgated by the SEC under Section 14 of theExchange Act; and certain additional reporting requirements by principalshareholders of the Company promulgated by the SEC under Section 13 of theExchange Act.

TheCompany’s strategy has been to profitably grow its business through internalgrowth and selective acquisitions.  Wecontinue to look for profitable expansion opportunities in existing andcontiguous markets.  At December 31, 2006,the Company had consolidated assets of $651.5 million, gross loans of $463.9million, deposits of $497.0 million and shareholder’s equity of $73.6 million.

TheCompany’s principal sources of income are from interest earning assets held inportfolio, as well as dividends from the Bank, which are currently restricted,and the income from the qualified intermediary companies.  The Company intends to explore supplementalsources of income in the future.  TheCompany’s website is www.thebankholdings.com.

Copiesof the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K and amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934are available free of charge through the Company’s website(www.thebankholdings.com) as soon as reasonably practicable after the Companyhas filed the material with, or furnished it to, the Securities and ExchangeCommission.  This information is alsoavailable at www.sec.gov, Bank Holdings CIK#000-1234383.

**The1031 Division**

DuringMarch 2006, the Federal Reserve Board approved the Company’s acquisition ofRocky Mountain Exchange (formerly Big Sky Property Exchange) of Bozeman,Montana and Granite Exchange Inc., of Roseville, California.  These companies are qualified intermediariesunder Section 1031 of the Internal Revenue Code.  The websites for these companies are:www.rockymountainexchange.com for Rocky Mountain Exchange and www.ges1031.comfor Granite Exchange. These companies have eleven full time equivalentemployees.

Aqualified intermediary (“QI”) is the professional provider of the mandatorymechanics of a 1031 exchange.  The use ofa qualified intermediary, as an independent party to facilitate a tax-deferredexchange, is a safe harbor established by Treasury Regulations.  These qualified intermediaries are frequentlyreferred to as accommodators or exchange facilitators.  When the taxpayer engages the services of“QI” pursuant to an 

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exchangeagreement, the IRS does not consider the taxpayer to be in receipt of any fundsfrom the transaction.  The sales proceedsgo directly to the QI, which holds them until they are needed to acquire anyreplacement property.  The QI thendelivers the funds directly to the closing agent who completes, generally witha title company, the deeding of the property directly to the taxpayer.  Without a QI, and pursuant to an exchangeagreement, the IRS may not define a transaction as an exchange, thereby makingit ineligible for tax deferment status.

Thetheory behind Section 1031 is that when a property owner has reinvested thesale proceeds into another property, the economic gain has not been realized ina way that generates funds to pay any tax. This means that the taxpayers investment is still the same, only theform has changed (e.g. from a rental house to a rented six-unit apartmentbuilding).  Therefore, it would be unfairto force the taxpayer to pay tax on a “form, not substance”, transfer.  These like-kind exchanges under Section 1031are tax deferred, not tax-free.  When thereplacement property is ultimately sold, (not as part of another exchange) theoriginal deferred gain, plus any additional gain realized since the purchase ofthe replacement property, is subject to tax.

TheCompany, through its 1031 Division, places funds that may be generated from suchtransactions, in the subsidiary bank, or in other financial institutions whereat least a portion of such funds is guaranteed by FDIC insurance.  Such funds are of a short term (less than 180days until maturity) nature, and are traditionally characterized as savings ormoney market deposits.

Theaddress of the Company’s 1031 QI’s are as follows:
| **Rocky Mountain Exchange:** | 1087 Stoneridge Drive             |
|------------------------------|-----------------------------------|
|                         | Bozeman, Montana  59718           |
|                         | (866) 554-1031                    |
|                         | Purchased: March  24, 2006        |
|                         |                              |
| **Granite  Exchange:**       | 1400 Rocky Ridge Drive, Suite 280 |
|                         | Roseville,  California 95661      |
|                         | (877) 937-1031                    |
|                         | Purchased: March  28, 2006        |

 

**TheBank**

**Nevada Security Bank**

NevadaSecurity Bank was incorporated under the laws of the State of Nevada onFebruary 26, 2001, and was licensed by the Nevada Commissioner of FinancialInstitutions and commenced operations as a Nevada state-chartered bank onDecember 27, 2001.  The Bank’s websiteis: www.nevadasecuritybank.com.

NevadaSecurity Bank (NSB) operates from its head office in Reno.  Additional Reno branches are Moana andMaeAnne.  The Bank also has branchoffices in Carson City, Sparks, and Incline Village, Nevada as well asRoseville, California.  Incline Villageis located on the north shore of Lake Tahoe, Nevada, approximately 25 milessouth of Reno, Nevada.  Roseville islocated in the Sacramento, California environs, about 124 miles southwest ofReno, Nevada. That branch is separately branded as Silverado Bank, a divisionof NSB.  Silverado Bank also focuses ongovernment guaranteed loans through the Small Business Administration, orSBA.  The addresses of our locations areas follows:

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**NorthernNevada**
| **Main**                | 9990 Double R Boulevard                 | **Incline Village:** | 910 Tahoe Boulevard, Suite 101 |
|-------------------------|-----------------------------------------|----------------------|--------------------------------|
| **Office:**             | Reno, Nevada 98521                      |                 | Incline Village, Nevada 89451  |
|                    |  (775) 853-8600                    |                 | (775) 832-8100                 |
|                    |  Date of opening: 12/27/01         |                 | Date of opening: 3/6/02        |
|                    |                                    |                 |                           |
|                    |                                    |                 |                           |
| **MaeAnne**             | 1680 Robb Drive                         | **Spanish Springs:** | 150 Isidor Court #203          |
| **Reno:**               | Reno, Nevada 89523                      |                 | Sparks, NV 89431               |
|                    | (775) 746-9800                          |                 | Phone: (775) 424-1500          |
|                    | Date of opening:  10/11/04              |                 | Date of Opening: 3/27/06       |
|                    |                                    |                 |                           |
| **Moana**               | 3490 So. Virginia St.                   | **Carson City:**     | 3120 Highway 50 East #1        |
| **Reno:**               | Reno, Nevada 89502                      |                 | Carson City, NV 89701          |
|                    | (775) 689-6555                          |                 | (775) 687-2323                 |
|                    | Date of Opening:  10/23/00              |                 | Date of Opening: 5/9/05        |
|                    |                                    |                 |                           |
| **Operations**          | 5450 Riggins Court #5                   |                 |                           |
| **Center**              | Reno, Nevada                            |                 |                           |
| **Reno:**               | (775) 689-6575                          |                 |                           |
|                    | Date of Opening: 8/11/00                |                 |                           |
|                    |                                    |                 |                           |
| **Northern California** |                                    |                 |
| ** **              |                                    |                 |
| **Roseville:**          | 2270 Douglas Blvd., Ste 220             |                 |                           |
|                    | Roseville,  California 95991-4239       |                 |                           |
|                    | (916) 787-1900                          |                 |                           |
|                    | Date of opening:  3/18/05               |                 |                           |
|                    |                                    |                 |                           |
| **Rancho**              | 2865 Sunrise Blvd. Ste 100              |                 |                           |
| **Cordova:**            | Rancho Cordova, CA 95742                |                 |                           |
|                    | Date of opening: Second quarter of 2007 |                 |                           |

 

Asan independent community oriented commercial bank, Nevada Security Bank offersa full range of consumer and commercial banking services primarily to thebusiness and professional community and individuals located in two primaryareas; Washoe county and Carson City, Nevada and Placer County,California.  Nevada Security Bank has afull complement of lending activities, including commercial and industrial,real estate construction, real estate mortgage, as well as agricultural andconsumer loans, with particular emphasis on short and medium-termobligations.  Nevada Security Bank’s loanportfolio is not concentrated in any one industry, although approximately 80%of Nevada Security Bank’s loans are secured by real estate.  A loan may be secured (in whole or in part)by real estate even though the purpose of the loan is not to facilitate thepurchase or development of real estate.

Asof December 31, 2006, the principal areas in which we directed our lendingactivities, and the percentage of our total loan portfolio for which each ofthose areas was responsible, were as follows: (i) loans secured by real estate 79.5%; (ii) commercial and industrial(including USDA) loans, 18.8%, and (iii) consumer loans 1.7%.  See Appendix 6 for further information.

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NevadaSecurity Bank offers a wide range of deposit instruments including personal andbusiness checking accounts and savings accounts, interest-bearingnegotiable order of withdrawal accounts, money market accounts and timecertificates of deposit.  Most of NevadaSecurity Bank’s deposits are attracted from individuals and from small andmedium-sized business-related sources.  Its deposits are insured under the FederalDeposit Insurance Act up to applicable limits, and subject to regulations bythat federal agency.  The Bank is subjectto periodic examinations of its operations and verification of compliance withapplicable laws and regulations issued by the FDIC and the Nevada FinancialInstitutions Division.

As of December 31, 2006 the Bank had 9,512 deposit accounts withbalances totaling approximately $447.0 million and as of December 31, 2005 4,196deposit accounts with balances totaling approximately $338.2 million, comparedto 3,549 deposit accounts with balances totaling approximately $188.3 millionat December 31, 2004.  We attractdeposits through our customer oriented product mix, competitive pricing, andconvenient locations where all are provided with the highest level of customerservice.  Further, we offer shared ATMand point-of-sale (POS) networks to allow customer access to national andinternational funds transfer networks, as well as remote capture devises tospeed a customer’s deposit funding efficiency.

Inaddition to the loan and deposit services Nevada Security Bank also offers awide range of specialized services designed to attract and meet the needs ofcommercial customers and personal account holders.  These services include cashiers’ checks,travelers’ checks and foreign drafts. Nevada Security Bank does not operate a trust department; however, ithas made an arrangement with a private trust company to offer trust services toits customers on request.  Most of NevadaSecurity Bank’s business originates from within Washoe and Douglas Counties,Nevada; however, Placer County, California is a substantial source ofadditional business through Silverado Bank, a division of Nevada Security Bank.Neither Nevada Security Bank’s business nor liquidity is seasonal, and therehas been no material effect upon Nevada Security Bank’s capital expenditures,earnings or competitive position as a result of federal, state or localenvironmental regulation.

**TheCompany**

TheCompany has not engaged in any material research activities relating to thedevelopment of new products or services during the last two fiscal years,however, a substantial investment of time and intellectual capital has been directedto the improvement of existing Bank services during the last twenty-fourmonths.  Specifically, during 2006 weopened the Bank’s fourth branch in the Spanish Springs area.  In addition, we completed the purchase of BigSky Property Exchange in Bozeman, Montana and the merger of Granite Exchange,LLC. into Granite Exchange Inc.; we acquired NNB Holdings, Inc. and itssubsidiary bank Northern Nevada Bank.  Webegan the process to open a second branch office in the northern Californiamarket in Rancho Cordova which is anticipated to open during the second quarterof 2007.  Further, the officers andemployees of the Bank are continually engaged in marketing activities,including the evaluation and development of new products and services, amongwhich are “free checking” and more comprehensive electronic bankingcapabilities to enable the Bank to retain and improve its competitive positionin its service areas.  During 2006 theBank tested remote deposit capture for implementation and roll-out during 2007.  Other alternatives for future electronicbanking delivery systems are currently being evaluated in an effort to keeppace with evolving technology, and to continue to provide superior service toour various individual customers and entities.

Wehold no patents or licenses (other than licenses required by appropriate bankregulatory agencies or cities in which we conduct business), franchises orconcessions.  We are not dependent on asingle customer or group of related customers for a material portion of ourdeposits, nor is a material portion of our loans concentrated within a singleindustry or group of related industries, except as noted in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”  The amounts expended in compliance with newgovernment and regulatory initiatives related to anti-terrorism, corporateresponsibility, and customer privacy 

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havesubstantially increased over the past few years, and the amount specificallyrelated to Sarbanes-Oxley Section 404 compliance is expected to increase during2007 and subsequent years.

Our mission is to be an organization of excellence by:

·              Providingquality banking products and services, offered personally and professionally;

·              Committingour resources, energy and leadership to our communities;

·              Creatingvalue for our shareholders;

·              Conductingour business with integrity and respect for all; and

·              Fulfillingpotential opportunities for growth and development.

Ourbusiness strategy is to increase shareholder and franchise value by continuingto expand our geographic footprint through new branches, regional and/or loanproduction offices, and/or strategic acquisitions as they may become available.We expect to achieve these goals with our core group of experienced bankers,meeting the needs of our constituent shareholder, customer, and employeegroups. This will be accomplished by understanding our customers’ needs andexpectations and addressing each of them in a focused and responsive fashion,on a timely basis.

Further,we expect to constantly refine and redefine our asset and liability portfoliosthrough growth and product line diversification, increase our base of higheryielding assets as the economic cycle changes, and improve our efficiency ratioas we leverage our talents and capital.

**Safetyand Soundness Standards**

Thefederal banking agencies have adopted guidelines establishing safety andsoundness standards for all insured depository institutions.  Thos guidelines relate to internal controls,information systems, internal audit systems, loan underwriting anddocumentation, compensation and interest rate exposure.  In general, the standards are designed toassist the federal banking agencies in identifying and addressing problems atinsured depository institutions before capital becomes impaired.  If an institution fails to meet thesestandards, the appropriate federal banking agency may require the institutionto submit a compliance plan and institute enforcement proceedings if anacceptable compliance plan is not submitted.

**Competition**

Thereare a large number of depository institutions including savings banks,commercial banks, and credit unions in the northern Nevada and the northernCalifornia counties in which the Company has offices.  The Bank, like other depository institutions,is operating in a rapidly changing environment. Non-depository financial service institutions primarily in thesecurities and insurance industries, have become competitors for retail savingsand investment funds.  Mortgagebanking/brokerage firms are actively competing for residential mortgagebusiness.  In addition to offeringcompetitive interest rates, the principal methods used by banking institutionsto attract deposits include the offering of a variety of services andconvenient office locations and business hours. The primary factors in competing for loans are interest rates and rateadjustment provisions, loan maturities, loan fees, and the quality of serviceto borrowers and brokers.

NevadaSecurity Bank competes for loans and deposits with other commercial banks,savings and loan associations, finance companies, money market funds, creditunions and other financial institutions, including a number that are muchlarger than Nevada Security Bank.  As ofJune 30, 2006, the most recent date for which data is available from the FDIC,there were 85 banking offices, including 51 offices of three major chain banks(Bank of America, US Bank and Wells Fargo), operating within Nevada SecurityBank’s primary market areas in Washoe County.  These three major chain banks were reported tohave held 25.8% of the deposits in Washoe County at June 30, 2006. Further, thesingle Charles Schwab Bank NA, office alone holds an additional 56.2% of thecounty’s reported total deposits.  Nevada Security Bank’s share of such market at that date was reported tobe 1.78% of the county’s $15.2 billion deposit base (4.06% exclusive ofSchwab), as compared to 1.73% of

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thecounty’s $11.2 billion deposit base on June 30, 2005 (2.53% exclusive ofSchwab), and compared to 0.73% of the county’s $9.2 billion deposit base atJune 30, 2004.  At June 30, 2006 the Bankwas the second largest independent bank headquartered in northern Nevada.  Of the $4.0 billion change in the county’sdeposit base between June 30, 2005 and 2006, $3.8 billion or 95% wasrepresented by the Schwab office.  Therehas been increased competition for deposit and loan business over the lastseveral years as a result of deregulation. Many of the major commercial banks operating in Nevada Security Bank’smarket areas offer certain services, such as trust and international bankingservices, which Nevada Security Bank does not offer directly.  Additionally, banks with largercapitalization have larger lending limits and are thereby able to serve largercustomers.  At December 31, 2006, thelegal lending limit for Nevada Security Bank was approximately $16.8 million.

Toa great extent, the super-regional state banks and multi-state chain banks alsohave the advantage of geographically diffused name recognition and may activelypursue wide-ranging advertising campaigns and branding tactics which are notavailable to a local community institution, due to economies of scale.

Further,other competitors have entered banking markets with focused products targetedat specific highly profitable customer segments.  Many competitors are able to compete acrossgeographic boundaries that are blocked to us and provide customers withalternatives to traditional banking services and nearly all significantproducts.  These competitive trends arelikely to continue.

Inaddition to competition from insured depository institutions, principalcompetitors for deposits and loans have been mortgage companies, insurancecompanies, investment brokerage houses, credit card companies and even retailestablishments offering investment vehicles such as mutual funds, annuities andmoney market funds, as well as traditional bank-like services such as checkaccess to money market funds, or cash advances on credit card accounts.

Inorder to compete with the other financial institutions in its principalmarketing areas, Nevada Security Bank relies principally upon local promotionalactivities, personal contacts by its officers, directors and employees, andclose connections with its communities.

TheBank primarily targets its general commercial banking services to businesses,professional concerns, developers and individuals residing in or doing businessin the greater Reno, Sparks, Carson City and Incline Village communities innorthern Nevada, and the Roseville community in northern California.  As an independent community bank, managementemphasizes quality service, efficiency and personal attention to the needs ofits customers.  The Bank’s wide range ofdeposit accounts is designed to attract businesses, professionals andindividuals as depositors.  Managementhas hired competent and professional banking staff in its branches to focus onthe financial needs of its customers, and various promotional opportunitieshave been made available to customers through newspaper advertising and flyers.

TheBank’s full complement of lending products includes commercial lines of creditand term loans, credit lines to individuals, checking overdraft credit lines,professional loans, SBA loans, equipment loans, accounts receivable financingand real estate and construction loans. The Bank offers attractive andcompetitive programs for lot loans, owner-builders of personal residences, andcommercial term real estate loan financing. Consumer loans offered include auto loans, home improvement loans, andhome equity lines of credit.  Toaccommodate borrowers with loan requests which exceed the Bank’s legal lendinglimit, the Bank has established participation arrangements with correspondentbanks to facilitate approval and funding. Management has hired a professional and competent lending staffcomprised of numerous commercial and real estate lenders with substantial yearsof knowledge, experience and expertise in the northern Nevada and northernCalifornia markets.

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Theseindividuals have expertise in consumer, real estate and commercial lending, inaddition to current knowledge of government lending programs, and all areas ofdeposit management facilities.  Whencompeting one-on-one with the chain banks, we feel our strength lies in ourcapabilities at the individual level.

TheBank offers other services including an internet banking alternative, cashmanagement, credit cards, wire transfers, ATM networks, courier, nightdepository facilities, safe deposit boxes, etc. All services stress convenient, personal attention and efficient, timelypresentation for the Bank’s clientele base.

Incertain instances, we have been unable to compete for deposit acquisitionbusiness due solely to our lack of extensive and well known operatinghistory.  In these situations, there arefew alternatives available to us. However, we may have other specialized services to overcome someobjections to our relatively short five full years of operating history, suchas those available from correspondent banks, the highly technologicalalternative delivery channels available through our website, and theever-present capabilities of our well-seasoned and extraordinarily capablestaff.

TheBank’s Board of Directors, management and staff are active in local civic,charitable and community organizations and events, soliciting businessreferrals and generating profitable business opportunities for the Bank.  The Bank relies on its independent status, flexibilityand timely response to provide greater personal service to customers.  The Bank emphasizes personal contacts withpotential customers by management, the Board of Directors and staff to developlocal promotional activities and to develop specialized or streamlinedservices.  The Bank prides itself onbeing a local bank for local people and businesses.

**SubsequentEvents**

TheCompany declared a 5% stock dividend to shareholders of record February 15,2007 with an ex-dividend date of February 13, 2007. For every 20 shares ofcommon stock held, shareholders will receive one (1) additional share of commonstock. No fractional shares will be issued; fractional shares will be roundedup to the nearest whole share. The transfer agent mailed certificatesrepresenting the 5% stock dividend on or about March 1, 2007.

InJanuary 2007 the Company acquired an additional 5% of Granite Exchange, Inc. ata predetermined cost of $265,000 from one of its minority shareholders.  This transaction will increase the Company’sownership to 80% and will allow the Company to include Granite Exchange in itsconsolidated tax returns.

**Employees**

Asof December 31, 2006, the Company had 121 employees.  Of these, Nevada Security Bank has 109employees, the 1031 division has eleven employees, and the parent has one fulltime employee.  On a full-time equivalentbasis, the Company’s staff level was 115.7 at December 31, 2006, as compared to57.2 at December 31, 2005 and 43.9 at December 31, 2004.  Staff was added during 2006 primarily due tothe Company’s purchase of the 1031 companies, acquisition of NNB Holdings, Inc,and the addition of other professional staff at other locations.  None of our employees is represented by aunion or covered by a collective bargaining agreement.  Management of the Company believes itsemployee relations are satisfactory.

**RecentAccounting Pronouncements**

**FASB159**

InFebruary 2007, the FASB issued SFAS No. 159, *Fair Value Option for Financial Assets and Financial Liabilities,including an amendment of FASB Statement No. 115.* SFAS 159permits entities to choose to measure many financial instruments and certainother items at fair value at specified election dates. The fair value optionmay be applied instrument by instrument with certain exceptions and is appliedgenerally on an irrevocable basis to the entire instrument. SFAS 159 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007. Early adoption is permitted under certaincircumstances. Management is evaluating the impact this Statement may have onthe Company’s financial statements.

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**FASB 157**

InSeptember 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*. The statement defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements. The statement emphasizes that fair value is amarket-based measurement, not an entity-specific measurement and establishes afair value hierarchy. This statement also clarifies how the assumptions of riskand the effect of restrictions on sales or use of an asset effect thevaluation. SFAS 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years. Early adoption is permitted. Management is evaluating the impactthis Statement may have on the Company’s financial statements.

**EITF 06-04**

InSeptember 2006, the Emerging Issues Task Force (“EITF”) of the FASB ratifiedEITF Issue No. 06-4, *Accounting forDeferred Compensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements*, and EITF Issue No. 06-5, *Accounting for Purchases of Life Insurance —Determining the Amount That Could Be Realized in Accordance with FASB TechnicalBulletin No. 85-4, Accounting for Purchases of Life Insurance*.EITF 06-4 provides that an employer should recognize a liability for futurebenefits based on the substantive agreement with the employee. The Issue shouldbe applied to fiscal years beginning after December 15, 2007, with earlierapplication permitted. EITF 06-5 provides that in determining the amountrecognized as an asset, a policyholder should consider the cash surrender valueas well as any additional amounts included in the contractual terms of thepolicy that will be paid upon surrender. The amount that could be realizedshould be calculated at the individual policy level and consider any probablecontractual limitations, including the exclusion of any additional amounts paidfor the surrender of an entire group of policies. The Issue is effective for fiscalyears beginning after December 15, 2007. The banking subsidiary of theCompany has life insurance arrangements. We are currently evaluating the impact of adoption of this rule on theCompany’s financial statements and results of operations.

**SAB 108**

InSeptember 2006, the Securities and Exchange Commission issued Staff AccountingBulletin (SAB) 108, *Considering the Effects ofPrior Year Misstatements**when QuantifyingMisstatements in Current Year Financial Statements*, expressing thestaff’s view regarding the process of quantifying financial statementmisstatements. SAB 108 requires that when quantifying misstatements for thepurposes of evaluating materiality, the effects on both the income statementand balance sheet should be considered. The Company has evaluated therequirements of SAB 108, and we have determined that the adoption of theseissues will not have a material impact on the Company’s financial statements orresults of operations.

**FASB FIN 48**

InJune 2006, the FASB issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*, which provides clarification foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with SFAS No. 109, *Accounting for IncomeTaxes*. This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on de-recognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. The Interpretation is effective for fiscal years beginning afterDecember 31, 2006. Management does not believe that the implementation willhave a material effect on the Company’s financial position, results ofoperations or cash flows.

Thelist of recent accounting pronouncements noted above, while not an exhaustivelist, includes those which we believe will, or may, have the greatestlikelihood of application to the Company’s consolidated balance sheets and/orconsolidated statements of operations. We believe that adoption of these standards will not have a materialimpact on our financial condition, results of operations, earnings per share orcash flow, however, no absolute assurance can be given that this in fact willoccur.

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**Regulationand Supervision**

Thefollowing discussion sets forth certain of the material elements of thesignificant regulatory framework provided by federal and state regulatoryagencies applicable to bank holding companies and their subsidiaries andprovides certain specific information relevant to the Company.  The regulatory framework is intendedprimarily for the protection of depositors and the insurance funds administeredby the FDIC and not for the protection of security holders.  To the extent that the following informationdescribes statutory and regulatory provisions, it is qualified in its entiretyby reference to the particular statutory and regulatory provisions.  A change in applicable status, regulations orregulatory policy may have a material effect on our business. The followingdiscussion of statutes and regulations is only a brief summary and does notpurport to be complete.  This discussionis qualified in its entirety by reference to such statutes andregulations.  No assurance can be giventhat such statues or regulations will not change in the future.

**TheCompany**

TheCompany is subject to the periodic reporting requirements of Section 13 of theSecurities Exchange Act of 1934 (the “Exchange Act”) which require the Companyto file annual, quarterly and other current reports with the Securities andExchange Commission (the “SEC”).  TheCompany is also subject to additional regulations including, but not limitedto, the proxy and tender offer rules promulgated by the SEC under Sections 13and 14 of the Exchange Act; the reporting requirements of directors, executiveofficers and principle shareholders regarding transactions in the Company’sCommon Stock and short–swing profits rules promulgated by the SEC under Section16 of the Exchange Act; and certain additional reporting requirements byprincipal shareholders of the Company promulgated by the SEC under Section 13of the Exchange Act.

TheCompany is a bank holding company within the meaning of the Bank HoldingCompany Act of 1956 (“BHCA”) and is registered as such with the Federal ReserveBoard.  A bank holding company isrequired to file with the Federal Reserve Board annual reports and otherinformation regarding its business operations and those of itssubsidiaries.  It is also subject toexamination by the Federal Reserve Board and is required to obtain FederalReserve Board approval before acquiring, directly or indirectly, ownership orcontrol of any voting shares of any bank if, after such acquisition, it woulddirectly or indirectly own or control more than 5% of the voting stock of thatbank, unless its already owns a majority of the voting stock of that bank.

TheFederal Reserve Board has by regulation determined certain activities in whicha bank holding company may or may not conduct business.  A bank holding company must engage, withcertain exceptions, in the business of banking or managing or controlling banksor furnishing services to or performing services for its subsidiary banks.  The permissible activities and affiliationsof certain bank holding companies have recently been expanded.  (See “Financial Modernization Act” below.)

TheCompany, it’s qualified intermediary exchange companies and Bank are deemed tobe affiliates of each other within the meaning set forth in the Federal ReserveAct and are subject to Sections 23A and 23B of the Federal Reserve Act.  This means, for example, that there arelimitations on loans by the Bank to affiliates, and that all affiliatetransactions must satisfy certain limitations and otherwise be on terms andconditions at least as favorable to the Bank as would be available fornon-affiliates.

TheFederal Reserve Board has a policy that bank holding companies must serve as asource of financial and managerial strength to their subsidiary banks.  It is the Federal Reserve Bank’s positionthat bank holding companies should stand ready to use their available resourcesto provide adequate capital to their subsidiary banks during periods offinancial stress or adversity.  Bankholding companies should also maintain the financial flexibility andcapital-raising capacity to obtain additional resources for assisting theirsubsidiary banks.

TheFederal Reserve Board also has the authority to regulate bank holding companydebt, including the authority to impose interest rate ceilings and reserverequirements on such debt.  Under certaincircumstances, the Federal Reserve Board may require the Company to filewritten notice and obtain its approval prior to purchasing or redeeming theCompany’s equity securities.

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**TheBank**

Asa Nevada state-chartered bank whose accounts are insured by the FDIC up to amaximum of $100,000 per depositor, the Bank is subject to regulation,supervision and regular examination by the Nevada Financial InstitutionsDivision (the “FID”) and the FDIC.  Inaddition, while the Bank is not a member of the Federal Reserve System, it issubject to certain regulations of the Federal Reserve Board.  The regulations of these agencies govern mostaspects of the Bank’s business, including the making of periodic reports by theBank and the Bank’s activities relating to dividends, investments, loans,borrowings, capital requirements, certain check-clearing activities, branching,mergers and acquisitions, reserves against deposits and numerous otherareas.  Supervision, legal action andexamination of the Bank by the DFI and FDIC is generally intended to protectdepositors and is not intended for the protection of shareholders.

Theearnings and growth of the Bank are largely dependent on its ability tomaintain a favorable differential or “spread” between the yield on itsinterest-earning assets and the rate paid on its deposits and otherinterest-bearing liabilities.  As aresult, the Bank’s performance is influenced by general economic conditions,both domestic and foreign, the monetary and fiscal policies of the federalgovernment, and the policies of the regulatory agencies, particularly theFederal Reserve Board.  The FederalReserve Board implements national monetary policies (such as seeking to curbinflation and combat recession) by its open market operations in United StatesGovernment securities, by adjusting the required level of reserves forfinancial institutions subject to its reserve requirements and by varying thediscount rate applicable to borrowings by banks that are members of the FederalReserve System.  The actions of theFederal Reserve Board in these areas influence the growth of bank loans, investmentsand deposits and also affect interest rates charged on both loans anddeposits.  The nature and impact of anyfuture changes in monetary policies cannot be reasonably predicted.

**CapitalAdequacy Requirements**

TheCompany and the Bank are subject to the regulations of the Federal Reserve Boardand the FDIC, respectively, governing capital adequacy.  The Bank and the Company currently exceed allregulatory minimums.  Those regulationsincorporate both risk-based and leverage capital requirements.  Each of the federal regulators has establishedrisk-based and leverage capital guidelines for the banks or bank holdingcompanies it regulates, which set total capital requirements and define capitalin terms of “core capital elements,” or Tier 1 capital; and “supplementalcapital elements,” or Tier 2 capital. Tier 1 capital is generally defined as the sum of the core capitalelements less goodwill and certain other deductions, notably the unrealized netgains or losses (after tax adjustments) on available for sale investmentsecurities carried at fair market value. The following items are defined as core capital elements:  (i) common shareholders’ equity; (ii)qualifying non-cumulative perpetual preferred stock and related surplus (not toexceed 25% of tier 1 capital); and (iii) minority interest in the equity ofconsolidated subsidiaries.  Supplementarycapital elements include:  (i) allowancefor loan and lease losses (but not more than 1.25% of an institution’s risk-weightedassets); (ii) perpetual preferred stock and related surplus not qualifying ascore capital; (iii) hybrid capital instruments, perpetual debt and mandatoryconvertible debt instruments; and (iv) term subordinated debt andintermediate-term preferred stock and related surplus.  The maximum amount of supplemental capitalelements which qualifies as Tier 2 capital is limited to 100% of Tier 1capital, net of goodwill.

Theminimum required ratio of qualifying capital to total risk-weighted assets is8.0% (“Total Risk-Based Capital Ratio”), at least one-half of which must be inthe form of Tier 1 capital, and the minimum required ratio of Tier 1 capital tototal risk-weighted assets is 4.0% (“Tier 1 Risk-Based Capital Ratio”).  Risk-based capital ratios are calculated toprovide a measure of capital that reflects the degree of risk associated with abanking organization’s operations for both transactions reported on the balancesheet as assets, and transactions, such as letters of credit and recoursearrangements, which are recorded as off-balance sheet items.  Under the risk-based capital guidelines, thenominal dollar amounts of assets and credit-equivalent amounts of off-balancesheet items are multiplied by one of several risk adjustment percentages, whichrange from 0% for assets with low credit risk, such as certain U.S. Treasurysecurities, to 100% for assets with relatively high credit risk, such asbusiness loans.  As of December 31, 2006and 2005, the Bank’s Total Risk-Based Capital ratios were 

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12.98%and 12.51%, respectively, and its Tier 1 Risk-Based Capital Ratios were 9.97%and 11.42%, respectively.

Therisk-based capital requirements also take into account concentrations of credit(i.e., relatively large proportions of loans involving one borrower, industry,location, collateral or loan type) and the risks of “non-traditional”activities (those that have not customarily been part of the bankingbusiness).  The regulations requireinstitutions with high or inordinate levels of risk to operate with higherminimum capital standards, and authorize the regulators to review an institution’smanagement of such risks in assessing an institution’s capital adequacy.

Additionally,the risk-based capital regulations also include exposure to interest rate riskas a factor that the regulators will consider in evaluating a bank’s capitaladequacy.  Interest rate risk is theexposure of a bank’s current and future earnings and equity capital arisingfrom adverse movements in interest rates. While interest rate risk is inherent in a bank’s role as financialintermediary, it introduces volatility to earnings and to the economic value ofthe bank.

TheFDIC and the Federal Reserve Board also require the maintenance of a leveragecapital ratio designed to supplement risk-based capital guidelines.  Banks and bank holding companies that havereceived the highest rating of the five categories used by regulators to ratebanks and are not anticipating or experiencing any significant growth mustmaintain a ratio of Tier 1 capital (net of all intangibles) to adjusted totalassets (“Leverage Capital Ratio”) of at least 3%.  All other institutions are required tomaintain a leverage ratio of at least 100 to 200 basis points above the 3%minimum, for a minimum of 4% to 5%. Pursuant to federal regulations, banks must maintain capital levelscommensurate with the level of risk to which they are exposed, including thevolume and severity of problem loans; federal regulators may, however, sethigher capital requirements when a bank’s particular circumstanceswarrant.  The Bank’s Leverage CapitalRatio was 8.04% and 8.96% on December 31, 2006 and 2005 respectively.  As of December 31, 2006, the Company’sleverage capital ratio was 9.85%, as compared to 10.06% at December 31,2005.  Both of these ratios exceededregulatory minimums, and since the most recent balance sheet date, managementdoes not believe conditions or events have changed the institution’s category.

Formore information on the Company’s capital, see Part II, Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operation–CapitalResources.  Risk–based capital ratiorequirements are discussed in greater detail in the following section.

**PromptCorrective Action Provisions**

Federallaw requires each federal banking agency to take prompt corrective action toresolve the problems of insured financial institutions, including but notlimited to those that fall below one or more proscribed minimum capitalratios.  The federal banking agencieshave by regulation defined the following five capital categories:  “well–capitalized” (Total Risk–Based CapitalRatio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio of 5%);“adequately capitalized” (Total Risk–Based Capital Ratio of 8%; Tier 1Risk-Based Capital Ratio of 4%; and Leverage Ratio of 4%) (or 3% if theinstitution receives the highest rating from its primary regulator);“undercapitalized” (Total Risk–Based Capital Ratio of less than 8%; Tier 1Risk-Based Capital Ratio of less than 4%; and Leverage Ratio of less than 4%)(or 3% if the institution receives the highest rating from its primaryregulator); “significantly undercapitalized” (Total Risk–Based Capital Ratio ofless than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; and LeverageRatio of less than 3%); and “critically undercapitalized” (tangible equity tototal assets less than 2%).  A bank maybe treated as though it were in the next lower capital category if after noticeand the opportunity for a hearing, the appropriate federal agency finds anunsafe or unsound condition or practice so warrants, but no bank may be treatedas “critically undercapitalized” unless its actual capital ratio warrants suchtreatment.

Ateach successively lower capital category, an insured bank is subject toincreased restrictions on its operations. For example, a bank is generally prohibited from paying management feesto any controlling persons or from making capital distributions if to do sowould make the bank “undercapitalized.” Asset growth and branching restrictions apply to undercapitalized banks,which are required to submit written capital restoration plans meetingspecified requirements (including a guarantee by the parent holding company, ifany).  

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“Significantlyundercapitalized” banks are subject to broad regulatory authority, includingamong other things, capital directives, forced mergers, restrictions on therates of interest they may pay on deposits, restrictions on asset growth andactivities, and prohibitions on paying bonuses or increasing compensation tosenior executive officers without FDIC approval.  Even more severe restrictions apply tocritically undercapitalized banks.  Mostimportantly, except under limited circumstances, not later than 90 days afteran insured bank becomes critically undercapitalized the appropriate federalbanking agency is required to appoint a conservator or receiver for the bank.

Inaddition to measures taken under the prompt corrective action provisions,insured banks may be subject to potential actions by the federal regulators forunsafe or unsound practices in conducting their businesses or for violations ofany law, rule, regulation or any condition imposed in writing by the agency orany written agreement with the agency. Enforcement actions may include the issuance of cease and desist orders,termination of insurance of deposits (in the case of a bank), the imposition ofcivil money penalties, the issuance of directives to increase capital, formaland informal agreements, or removal and prohibition orders against “institution–affiliated”parties.

**Safetyand Soundness Standards**

Thefederal banking agencies have also adopted guidelines establishing safety andsoundness standards for all insured depository institutions.  Those guidelines relate to internal controls,information systems, internal audit systems, loan underwriting anddocumentation, compensation and interest rate exposure.  In general, the standards are designed toassist the federal banking agencies in identifying and addressing problems atinsured depository institutions before capital becomes impaired.  If an institution fails to meet thesestandards, the appropriate federal banking agency may require the institutionto submit a compliance plan and may institute enforcement proceedings if anacceptable compliance plan is not submitted.

**Premiumsfor Deposit Insurance**

TheFDIC regulations also implement a risk–based premium system, whereby insureddepository institutions are required to pay insurance premiums depending ontheir risk classification.  Under thissystem, insured banks are categorized into one of three capital categories(well capitalized, adequately capitalized, and undercapitalized) and eachinstitution is also assigned to one of three supervisor groups based on theconsideration of supervisory evaluations provided by the institutions primary federalregulator.  The supervisory evaluationsinclude the results of examination findings by the primary regulator, as wellas other information the primary regulator determines to be relevant.  In addition, the FDIC will take intoconsideration such other information (such as state examination findings, ifappropriate) as it determines to be relevant to the institution’s financialcondition and the risk posed to the Deposit Insurance Fund.  The three supervisory categories are:  1) financially sound with only a few minorweaknesses and generally corresponds to the primary federal regulatorscomposite rate of “1” or “2” (Group A), 2) demonstrated weaknesses that couldresult in significant deterioration, and generally corresponds to theregulators composite rate of “3” (Group B), and 3) poses a substantialprobability of loss, and generally corresponds to the regulator composite rateof “4” or “5” (Group C).  The currentbase assessment rates (expressed as cents per $100 of deposits) are summarizedas follows:
| ** **                      | ** ** | **Risk Category** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **I ***           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Minimum**            | ** ** | **Maximum** | ** ** | **II** | ** ** | **III** | ** ** | **IV** | ** ** |
| Annual Rates (in  basis points) |       | 5                      |       | 7 |   | 10 |   | 28 |   | 43 |   |

 

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* Rates for institutionsthat do not pay the minimum or maximum rate will vary between these rates.

In general, while the FDIC’s Deposit Insurance Fund maintains a reserveratio of 1.25% or greater, no deposit insurance premiums are required.  In February 2006, the FDIC Reform Act of 2005was signed into law.  Included in thislegislation were provisions to merge the BIF and the Savings AssociationInsurance Fund into 

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one fund (the “Deposit Insurance Fund”), increase insurance coveragefor retirement accounts to $250,000 and index deposit insurance levels forinflation.

Inaddition, banks must pay an amount toward the retirement of the FinancingCorporation bonds issued in the 1980’s to assist in the recovery of the savingsand loan industry.  This amountfluctuates but for the first quarter of 2007 was 1.22 cents per $100 of insureddeposits.

**CommunityReinvestment Act**

TheBank is subject to certain requirements and reporting obligations involvingCommunity Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate therecord of a financial institution in meeting the credit needs of its localcommunities, including low and moderate income neighborhoods.  The CRA further requires the agencies to takeinto account a financial institution’s record of meeting its community creditneeds when evaluating applications for, among other things, domestic branches,consummating mergers or acquisitions, or holding company formations.  In measuring a bank’s compliance with its CRAobligations, the regulators utilize a performance—based evaluation system whichbases CRA ratings on the bank’s actual lending service and investmentperformance, rather than on the extent to which the institution conducts needsassessments, documents community outreach activities or complies with otherprocedural requirements.  In connection withits assessment of CRA performance, the FDIC assigns a rating of “outstanding,”“satisfactory,” or “substantial noncompliance.”

TheBank was examined for CRA compliance in November 2003 when it received an“Outstanding” CRA Assessment rating.

**OtherConsumer Protection Laws and Regulations**

Thebank regulatory agencies are increasingly focusing attention on compliance withconsumer protection laws and regulations. Examination and enforcement has become intense, and banks have beenadvised to carefully monitor compliance with various consumer protection lawsand regulations.  The federal InteragencyTask Force on Fair Lending issued a policy statement on discrimination in homemortgage lending describing three methods that federal agencies will use toprove discrimination:  overt evidence ofdiscrimination, evidence of disparate treatment, and evidence of disparateimpact.  In addition to CRA and fairlending requirements, the Bank is subject to numerous other federal consumerprotection statutes and regulations.  Dueto heightened regulatory concern related to compliance with consumer protectionlaws and regulations generally, the Bank may incur additional compliance costsor be required to expend additional funds for investments in the localcommunities it serves.

**InterstateBanking and Branching**

TheRiegle – Neal Interstate Banking and Branching Efficiency Act of 1994 (the“Interstate Banking Act”) regulates the interstate activities of banks and bankholding companies and establishes a framework for nationwide interstate bankingand branching.  Since June 1, 1997, abank in one state has generally been permitted to merge with a bank in anotherstate without the need for explicit state law authorization.  However, states were given the ability toprohibit interstate mergers with banks in their own state by “opting–out”(enacting state legislation applying equality to all out-of-state banksprohibiting such mergers) prior to June 1, 1997.

Since1995, adequately capitalized and managed bank holding companies have beenpermitted to acquire banks located in any state, subject to twoexceptions:  first, any state may stillprohibit bank holding companies from acquiring a bank which is less that fiveyears old; and second, no interstate acquisition can be consummated by a bankholding company if the acquirer would control more than 10% of the depositsheld by insured depository institutions nationwide or 30% or more of thedeposits held by insured depository institutions in any state in which thetarget bank has branches.

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Abank may establish and operate de novo branches in any state in which the bankdoes not maintain a branch if that state has enacted legislation to expresslypermit all out-of-state banks to establish branches in that state.

Thechanges effected by the Interstate Banking Act have increased competition inthe environment in which the Bank operates to the extent that out–of–statefinancial institutions directly or indirectly enter the Bank’s marketareas.  It appears that the InterstateBanking Act has contributed to the accelerated consolidation of the bankingindustry.  While many large out-of-statebanks have already entered the Nevada market as a result of this legislation,it is not possible to predict the precise impact of this legislation on theBank and the Company and the competitive environment in which they operate.

**Financial Modernization Act**

InNovember 1999, the Gramm-Leach-Bliley Act, or the GLB Act, became law,significantly changing the regulatory structure and oversight of the financialservices industry.  Effective March 11,2000, the GLB Act repealed the provisions of the Glass-Steagall Act thatrestricted banks and securities firms from affiliating.  It also revised the BHCA to permit a“qualifying” bank holding company, called a financial holding company, toengage in a full range of financial activities, including banking, insurance,securities, and merchant banking activities. It also permits qualifying bank holding companies to acquire many typesof financial firms without the FRB’s prior approval.

TheGLB Act thus provides expanded financial affiliation opportunities for existingbank holding companies and permits other financial services providers toacquire banks and become bank holding companies without ceasing any existingfinancial activities.  Previously, a bankholding company could only engage in activities that were “closely related tobanking.”  This limitation no longerapplies to bank holding companies that qualify to be treated as financialholding companies.  To qualify as afinancial holding company, a bank holding company’s subsidiary depositoryinstitutions must be well-capitalized, well-managed and have at least a“satisfactory” Community Reinvestment Act examination rating.  “Nonqualifying” bank holding companies arelimited to activities that were permissible under the BHCA as of November 11,1999.

Alsoeffective on March 11, 2000, the GLB Act changed the powers of national banksand their subsidiaries, and made similar changes in the powers of state banksand their subsidiaries.  National banksmay now underwrite, deal in and purchase state and local revenue bonds.  A subsidiary of a national bank may nowengage in financial activities that the bank cannot itself engage in, exceptfor general insurance underwriting and real estate development and investment.  In order for a subsidiary of a national bankto engage in these new financial activities, the national bank and itsdepository institution affiliates must be “well capitalized,” have at least“satisfactory” general, managerial and Community Reinvestment Act examinationratings, and meet other qualification requirements relating to total assets,subordinated debt, capital, risk management, and affiliate transactions.  Subsidiaries of state banks can exercise thesame powers as national bank subsidiaries if they satisfy the same qualifyingrules that apply to national banks, except that state-chartered banks do nothave to satisfy the statutory managerial and debt rating-requirements ofnational banks.

TheGLB Act also reformed the overall regulatory framework of the financialservices industry.  In order to implementits underlying purposes, the GLB Act preempted state laws that would restrictthe types of financial affiliations that are authorized or permitted under theGLB Act, subject to specified exceptions for state insurance laws andregulations.  With regard to securitieslaws, effective May 12, 2001, the GLB Act removed the blanket exemption forbanks from being considered brokers or dealers under the Securities ExchangeAct of 1934 and replaced it with a number of more limited exemptions.  Thus, previously exempted banks may becomesubject to the broker-dealer registration and supervision requirements of theSecurities Exchange Act of 1934.  Theexemption that prevented bank holding companies and banks that advise mutualfunds from being considered investment advisers under the Investment AdvisersAct of 1940 was also eliminated.

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Separately,the GLB Act imposes customer privacy requirements on any company engaged infinancial activities.  Under theserequirements, a financial company is required to protect the security andconfidentiality of customer nonpublic personal information.  Also, for customers who obtain a financialproduct such as a loan for personal, family or household purposes, a financialcompany is required to disclose its privacy policy to the customer at the timethe relationship is established and annually thereafter, including its policiesconcerning the sharing of the customer’s nonpublic personal information withaffiliates and third parties.  If anexemption is not available, a financial company must provide consumers with anotice of its information sharing practices that allows the consumer to rejectthe disclosure of its nonpublic personal information to third parties.  Third parties that receive such informationare subject to the same restrictions as the financial company on the reuse ofthe information.  Finally, a financialcompany is prohibited from disclosing an account number or similar item to athird party for use in telemarketing, direct mail marketing or other marketingthrough electronic mail.

**Sarbanes-Oxley Act**

DuringJuly 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002.  The purpose of the Sarbanes-Oxley Act is toprotect investors by improving the accuracy and reliability of corporatedisclosures made pursuant to the securities laws, and for other purposes.

TheSarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit aregistered public accounting firm from performing specified nonaudit servicescontemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the audit committee of an issuer withresponsibility for the appointment, compensation, and oversight of any registeredpublic accounting firm employed to perform audit services.  It requires each committee member to be amember of the board of directors of the issuer, and to be otherwiseindependent.  The Sarbanes-Oxley Actfurther requires the chief executive officer and chief financial officer of anissuer to make certain certifications as to each annual or quarterly report.

Inaddition, the Sarbanes-Oxley Act requires officers to forfeit specific bonusesand profits under certain circumstances. Specifically, if an issuer is required to prepare an accountingrestatement due to the material noncompliance of the issuer as a result ofmisconduct with any financial reporting requirement under the securities laws,the chief executive officer and chief financial officer of the issuer shall berequired to reimburse the issuer for (1) any bonus or other incentive-based orequity-based compensation received by that person from the issuer duringthe 12-month period following the first public issuance or filingwith the SEC of the financial document embodying such financial reportingrequirement; and (2) any profits realized from the sale of securities of theissuer during that 12-month period.

TheSarbanes-Oxley Act also instructs the SEC to require by rule:

·                                          disclosure of all material off-balance sheettransactions and relationships that may have a material effect upon thefinancial status of an issuer; and

·                                          the presentation of pro forma financialinformation in a manner that is not misleading, and which is reconcilable withthe financial condition of the issuer under generally accepted accountingprinciples.

TheSarbanes-Oxley Act also prohibits insider transactions in the company’s stockheld within its pension plans during lock out periods, and any profits on suchinsider transactions are to be disgorged. In addition, there is a prohibition of company loans to its executives,except in certain circumstances.  TheSarbanes-Oxley Act also provides for a mandated internal control report andassessment with the annual report and an attestation and a report on such reportby the company’s auditor.  The SEC alsorequires the company to issue a code of ethics for senior financial officers ofthe company.  Further, the Sarbanes-OxleyAct adds a criminal penalty of fines 

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andimprisonment of up to 10 years for securities fraud.    As noted in the recent accountingpronouncements, the effective date for implementation for non-acceleratedfilers is July 15, 2007.

**Regulation W**

TheFederal Reserve Board (“FRB”) on October 31, 2002 approved a final Regulation Wthat comprehensively implements sections 23A and 23B of the Federal ReserveAct.  Sections 23A and 23B and RegulationW restrict loans by a depository institution to its affiliates, asset purchasesby a depository institution from its affiliates, and other transactions betweena depository institution and its affiliates. Regulation W unifies in one public document the FRB’s interpretations ofsections 23A and 23B.  Regulation W hadan effective date of April 1, 2003.

**Regulatory CapitalTreatment of Equity Investments**

InDecember of 2001 and January of 2002, the OCC, the FRB and the FDIC adoptedfinal rules governing the regulatory capital treatment of equity investments innonfinancial companies held by banks, bank holding companies and financialholding companies.  The final rulesbecame effective on April 1, 2002.  Thenew capital requirements apply symmetrically to equity investments made bybanks and their holding companies in nonfinancial companies under the legalauthorities specified in the final rules. Among others, these include the merchant banking authority granted bythe Gramm-Leach-Bliley Act and the authority to invest in small businessinvestment companies (“SBICs”) granted by the Small Business InvestmentAct.  Covered equity investments will besubject to a series of marginal Tier 1 capital charges, with the size of thecharge increasing as the organization’s level of concentration in equityinvestments increases.  The highestmarginal charge specified in the final rules requires a 25 percent deductionfrom Tier 1 capital for covered investments that aggregate more than 25 percentof an organization’s Tier 1 capital. Equity investments through SBICs will be exempt from the new charges tothe extent such investments, in the aggregate do not exceed 15 percent of thebanking organization’s Tier 1 capital. The new charges would not apply to individual investments made bybanking organizations prior to March 13, 2000. Grandfathered investments made by state banks under section 24(f) of theFederal Deposit Insurance Act also are exempted from coverage.

**USA Patriot Act**

Theterrorist attacks in September 2001, have impacted the financial servicesindustry and led to federal legislation that attempts to address certain issuesinvolving financial institutions.  OnOctober 26, 2001, President Bush signed into law the Uniting andStrengthening America by Providing Appropriate Tools Required to Intercept andObstruct Terrorism Act of 2001 (“USA Patriot Act”).

Partof the USA Patriot Act is the International Money Laundering Abatement andFinancial Anti-Terrorism Act of 2001 (“IMLA”). IMLA authorizes the Secretary of the Treasury, in consultation with theheads of other government agencies, to adopt special measures applicable tobanks, bank holding companies, and/or other financial institutions.  These measures may include enhancedrecordkeeping and reporting requirements for certain financial transactionsthat are of primary money laundering concern, due diligence requirementsconcerning the beneficial ownership of certain types of accounts, andrestrictions or prohibitions on certain types of accounts with foreignfinancial institutions.

Amongits other provisions, IMLA requires each financial institution to: (i)establish an anti-money laundering program; (ii) establish due diligencepolicies, procedures and controls with respect to its private banking accountsand correspondent banking accounts involving foreign individuals and certainforeign banks; and (iii) avoid establishing, maintaining, administering, ormanaging correspondent accounts in the United States for, or on behalf of, aforeign bank that does not have a physical presence in any country.  In addition, IMLA contains 

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aprovision encouraging cooperation among financial institutions, regulatoryauthorities and law enforcement authorities with respect to individuals,entities and organizations engaged in, or reasonably suspected of engaging in,terrorist acts or money laundering activities. IMLA expands the circumstances under which funds in a bank account maybe forfeited and requires covered financial institutions to respond undercertain circumstances to requests for information from federal banking agencieswithin 120 hours.  IMLA also amends theBHCA and the Bank Merger Act to require the federal banking agencies toconsider the effectiveness of a financial institution’s anti-money launderingactivities when reviewing an application under these acts.  IMLA became effective July 23, 2002.

**Merchant BankingInvestments**

TheFRB and the Secretary of the Treasury in January 2001, jointly adopted a finalrule governing merchant banking investments made by financial holdingcompanies.  The rule implementsprovisions of the Gramm-Leach-Bliley Act discussed below that permit financialholding companies to make investments as part of a bona fide securitiesunderwriting or merchant or investment banking activity.  The rule provides that a financial holdingcompany may not, without FRB approval, directly or indirectly acquire any additionalshares, assets or ownership interests or make any additional capitalcontribution to any company the shares, assets or ownership interests of whichare held by the financial holding company subject to the rule if the aggregatecarrying value of all merchant banking investments held by the financialholding company exceeds:

·              30percent of the Tier 1 capital of the financial holding company, or

·                                          after excluding interests in private equityfunds, 20 percent of the Tier 1 capital of the financial holding company.

Aseparate final rule will establish the capital charge of merchant bankinginvestments for the financial holding company.

**Amendmentsto Regulation H and Y for Trust Preferred Securities.**

TheFederal Reserve Board issued a final rule on March 1, 2005 that amendsRegulation H and Regulation Y to limit restricted core capital elements(including trust preferred securities) which count as Tier 1 capital to 25percent of all core capital elements, net of goodwill less any associateddeferred tax liability.  Internationallyactive bank holding companies, defined as those with consolidated assetsgreater than $250 billion or on-balance-sheet foreign exposure greater than $10billion, will be subject to a 15 percent limit, but they may include qualifyingmandatory convertible preferred securities up to the generally applicable 25percent limit.  Amounts of restrictedcore capital elements in excess of these limits generally may be included inTier 2 capital.  The final rule providesa five-year transition period, ending March 31, 2009, for application of thequantitative limits.

On November 3, 2005 theCompany and its newly formed Connecticut statutory trust subsidiary, The BankHoldings Statutory Trust I (the “Trust”) entered into a purchase agreementpursuant to which it was agreed that the Trust would issue $15 million offloating interest rate trust preferred securities (the “Trust PreferredSecurities”) to Merrill Lynch International.  The Trust Preferred Securities were issued and sold in a private placementexempt from registration under the Securities Exchange Act of 1933, as amended.

The Trust PreferredSecurities will be redeemable at the Company’s option on or after December 15,2010.  In addition, the Trust PreferredSecurities require quarterly distributions of interest by the Trust to theHolders of the Trust Preferred Securities at a floating rate equal to the threemonth London Inter-bank Offered Rate (“LIBOR”) plus 1.42%, which ratethereafter will be reset until maturity.

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The Trust used the proceedsof the sale of the Trust Preferred Securities to purchase $15 million of theCompany’s floating rate junior subordinated debentures (the “Debentures”).  Like the Trust Preferred Securities, theDebentures bear interest at a floating rate equal to the three month LIBOR plus1.42%.

The Debentures will matureon December 15, 2035, but may be redeemed by the Company at its option at anytime on or after December 15, 2010.

As a result of the purchaseof and agreement with NNB Holdings, Inc. the Company acquired NNB HoldingsStatutory Trust I which was formed in June 2005 to issue $5,155,000 offixed/floating rate Cumulative Trust Preferred Securities, which are classifiedas junior subordinated debt.  The fixedrate of 5.95% began on the date of issuance and will end on (but not including)the interest payment date in June 2010, at which time the interest rateswitches to a floating interest rate equal to the three month LIBOR plus1.85%.  The acquired debentures willmature in 2035, but may be redeemed by the Company at its option at any time onor after June 15, 2010 with a payment of a premium as outlined in the indentureagreement.

**FinancialServices Regulatory Relief Act of 2006**

In October 2006, thePresident signed the Financial Services Regulatory Relief Act of 2006 into law(the “Relief Act”). The Relief Act amends several existing banking laws andregulations, eliminates some unnecessary and overly burdensome regulations ofdepository institutions and clarifies several existing regulations. The ReliefAct, among other things, (i) authorizes the Federal Reserve Board to setreserve ratios; (ii) amends national banks regulations relating to shareholdervoting and granting of dividends; (iii) amends several provisions relating to suchissues as loans to insiders, regulatory applications, privacy notices, andgolden parachute payments; and (iv) expands and clarifies the enforcementauthority of federal banking regulators. While it is too soon to predict theimpact this legislation will have on us, we do not expect that our business,expenses, or operations will be significantly impacted.

**FDIC Reform Act**

On February 8, 2006,the President signed The Federal Deposit Insurance Reform Act of 2005 (theReform Act) into law. The Federal Deposit Insurance Reform ConformingAmendments Act of 2005, which the President signed into law onFebruary 15, 2006, contains necessary technical and conforming changes toimplement deposit insurance reform, as well as a number of study and surveyrequirements. The Reform Act provides for the following changes:

·      Merging the Bank Insurance Fund(BIF) and the Savings Association Insurance Fund (SAIF) into a new fund,the Deposit Insurance Fund (DIF). This change was made effective March 31,2006.

·      Increasingthe coverage limit for retirement accounts to $250,000 and indexing thecoverage limit for retirement accounts to inflation as with the general depositinsurance coverage limit. This change was made effective April 1, 2006.

·      Establishinga range of 1.15 percent to 1.50 percent within which the FDIC Boardof Directors may set the Designated Reserve Ratio (DRR).

·      Allowing the FDIC to manage the pace atwhich the reserve ratio varies within this range.

1.               If the reserveratio falls below 1.15 percent—or is expected to within 6 months—theFDIC must adopt a restoration plan that provides that the DIF will return to1.15 percent generally within 5 years.

2.               If the reserveratio exceeds 1.35 percent, the FDIC must generally dividend to DIFmembers half of the amount above the amount necessary to maintain the DIF at1.35 percent, unless the FDIC Board, considering statutory factors,suspends the dividends.

3.               If the reserve ratio exceeds1.5 percent, the FDIC must generally dividend to DIF members all amountsabove the amount necessary to maintain the DIF at 1.5 percent.

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·                  Eliminating the restrictions on premium ratesbased on the DRR and granting the FDIC Board the discretion to price depositinsurance according to risk for all insured institutions regardless of thelevel of the reserve ratio.

·                  Granting a one-time initial assessment credit(of approximately $4.7 billion) to recognize institutions’ pastcontributions to the fund.

The Federal Reserve Board inFebruary 2006 approved a final rule that expands the definition of a smallbank holding company under its Small Bank Holding Company Policy Statement andthe Board’s risk-based and leverage capital guidelines for bank holdingcompanies. The policy statement facilitates the transfer of ownership of smallcommunity banks by permitting debt levels at small bank holding companies thatare higher than what would typically be permitted for larger small bank holdingcompanies. In its revisions to the Policy Statement, the Federal Reserve Boardhas raised the small bank holding company asset size threshold from$150 million to $500 million and amended the related qualitativecriteria for determining eligibility as a small bank holding company for thepurposes of the policy statement and the capital guidelines.

The FDIC finalized itsinterim final rule, with changes, that amended its deposit insuranceregulations to implement applicable revisions to the Federal Deposit InsuranceAct made by the Federal Deposit Insurance Reform Act of 2005 and the FederalDeposit Insurance Reform Conforming Amendments Act of 2005. The final ruleprovides for consideration of inflation adjustments to increase the currentstandard maximum deposit insurance amount of $100,000 on a five-year cyclebeginning in 2010; increases the deposit insurance limit for certain retirementaccounts from $100,000 to $250,000, also subject to inflation adjustments; andprovides per-participant insurance coverage to employee benefit plan accounts,even if the depository institution at which the deposits are placed is notauthorized to accept employee benefit plan deposits. The final rule iseffective on October 12, 2006.

The Board of Governors ofthe Federal Reserve System amended Regulation E, which implements theElectronic Fund Transfer Act, and the official staff commentary to theregulation, which interprets the requirements of Regulation E to becomeeffective on July 1, 2006. The final rule provides that Regulation Ecovers payroll card accounts that are established directly or indirectly throughan employer, and to which transfers of the consumer’s salary, wages, or otheremployee compensation are made on a recurring basis. The final rule alsoprovides financial institutions with an alternative to providing periodicstatements for payroll card accounts if they make account information availableto consumers by specified means.

The federal financialregulatory agencies in September 2006 issued final guidance to address therisks posed by nontraditional residential mortgage products that allowborrowers to defer repayment of principal and sometimes interest, including“interest-only” mortgages and “payment option” adjustable-rate mortgages. Theseproducts allow borrowers to exchange lower payments during an initial periodfor higher payments later. The lack of principal amortization and the potentialfor negative amortization and features that compound risks (such as no documentloans and simultaneous second mortgages) elevate the concern of the federalbanking agencies for nontraditional mortgage products. The guidelines requiredepository institutions to ensure that loan terms and underwriting standardsare consistent with prudent lending practices, including consideration of aborrower’s repayment capacity, to recognize that many nontraditional mortgageloans, particularly when they have risk-layering features, are untested in astressed environment. The guidelines also express the need for depositoryinstitutions to have strong risk management standards, capital levelscommensurate with the risk, an allowance for loan and lease losses thatreflects the collectibility of the portfolio, and the need to make sure thatconsumers have sufficient information to clearly understand loan terms andassociated risks prior to making a product or payment choice.

The federal financialregulatory agencies in December 2006 issued a new interagency policystatement on the allowance for loan and lease losses (ALLL) along withsupplemental frequently asked questions. The policy statement revises andreplaces a 1993 policy statement on the ALLL. The agencies issued the revisedpolicy statement in view of today’s uncertain economic environment and thepresence of concentrations in untested loan products in the loan portfolios ofinsured depository institutions. The policy statement has also been revised toconform with generally accepted accounting principles (GAAP) and post-1993supervisory guidance. 

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The 1993 policy statementdescribed the responsibilities of the boards of directors, management, andbanking examiners regarding the ALLL; factors to be considered in theestimation of the ALLL; and the objectives and elements of an effective loanreview system, including a sound credit grading system. The policy statementreiterates that each institution has a responsibility for developing,maintaining and documenting a comprehensive, systematic, and consistentlyapplied process appropriate to its size and the nature, scope, and risk of itslending activities for determining the amounts of the ALLL and the provisionfor loan and lease losses and states that each institution should ensurecontrols are in place to consistently determine the ALLL in accordance withGAAP, the institution’s stated policies and procedures, management’s bestjudgment and relevant supervisory guidance.

The policy statement alsorestates that insured depository institutions must maintain an ALLL at a levelthat is appropriate to cover estimated credit losses on individually evaluatedloans determined to be impaired as well as estimated credit losses inherent inthe remainder of the loan and lease portfolio, and that estimates of creditlosses should reflect consideration of all significant factors that affect thecollectibility of the portfolio as of the evaluation date. The policy statementstates that prudent, conservative, but not excessive, loan loss allowances thatrepresent management’s best estimate from within an acceptable range ofestimated losses are appropriate. The Office of the Comptroller of theCurrency, the Board of Governors of the Federal Reserve System, and the FederalDeposit Insurance Corporation in December 2006 issued final guidance onsound risk management practices for concentrations in commercial real estatelending. The agencies observed that the commercial real estate is an area inwhich some banks are becoming increasingly concentrated, especially with small-to medium- sized banks that face strong competition in their other businesslines. The agencies support banks serving a vital role in their communities bysupplying credit for business and real estate development. However, theagencies are concerned that rising commercial real estate loan concentrationsmay expose institutions to unanticipated earnings and capital volatility in theevent of adverse changes in commercial real estate markets. The guidanceprovides supervisory criteria, including numerical indicators to assist inidentifying institutions with potentially significant commercial real estateloan concentrations that may warrant greater supervisory scrutiny, but suchcriteria are not limits on commercial real estate lending.

**OtherPending and Proposed Legislation**

Other legislative andregulatory initiatives which could affect the Company, the Bank, our qualifiedintermediary companies and the banking industry in general are pending, andadditional initiatives may be proposed or introduced before the United StatesCongress, the Nevada legislature, the California, Hawaii and Montanalegislatures and other governmental bodies in the future.  Such proposals, if enacted, may further alterthe structure, regulation, and competitive relationship among financialinstitutions, and may subject the Company to increased regulation, disclosure,and reporting requirements.  In addition,the various banking regulatory agencies often adopt new rules and regulationsto implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation orregulations may be enacted or the extent to which the business of the Companyor the Bank would be affected thereby.

**OtherInformation Concerning the Company**

The Company holds nomaterial patents, trademarks, licenses, franchises or concessions.  No expenditures were made by the Companysince inception on material research activities relating to the development ofservices or the improvement of existing services.  Based upon present business activities,compliance with federal, state and local provisions regulating discharge ofmaterials into the environment will have no material effects upon the capitalexpenditures, earnings or competitive position of the company.

We are subject to certain ofthe informational requirements of the Securities Exchange Act of 1934, asamended, referred to as the Exchange Act. In accordance with the Exchange Act, we file annual and quarterlyreports and other information with the Securities and Exchange Commission, orSEC.  Copies may be obtained at theprescribed rates from the public reference room maintained by the SEC at 450Fifth Street, N.W., Washington, D.C. 20549 and be inspected without charge and copied at the prescribed ratesat the SEC’s regional office at Northwestern Atrium Center, 500 West MadisonStreet, Suite 1400, Chicago, Illinois 60661. 

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The public may also obtaininformation on the operation of the public reference room by calling the SEC at1-800-SEC-0330.  An electronic version ofour filings may be viewed at the SEC’s website: www.sec.gov, CIK #1234383.  Additionally, this site also provides accessto any other report or other information we file with the SEC.

**Accountingfor Goodwill**

Goodwill arises frombusiness acquisitions and represents the value attributable to theunidentifiable intangible elements in our acquired businesses.  Goodwill is initially recorded at fair valueand is subsequently evaluated at least annually for impairment in accordancewith SFAS No. 142.  The Company performsthis annual test generally as of October 1 of each year.  Evaluations are also performed on a more frequentbasis if events or circumstances indicate an impairment could have takenplace.  Such events could include, amongothers, a significant adverse change in the business climate, an adverse actionby a regulator, an unanticipated change in the competitive environment and adecision to change the operations or dispose of a reporting unit.

The first step in thisevaluation process is to determine if a potential impairment exists in any ofthe Company’s reporting units and, if required from the results of this step, asecond step measures the amount of any impairment loss.  The computations required by steps 1 and 2call for us to make a number of estimates and assumptions.  In completing step 1, we determine the fairvalue of the reporting unit that is being evaluated.  In determining the fair value, we generallycalculate value using a combination of up to three separate methods:  comparable publicly traded financial servicecompanies in the Western states; comparable acquisitions of financial servicescompanies in the Western states; and, the discounted present value ofmanagement’s estimates of future cash or income flows.  Critical assumptions that are used as part ofthese calculations include:

·                  selection of comparable publicly tradedcompanies, based on location, size and business composition;

·                  selection of comparable acquisitiontransactions, based on location, size, business composition and date oftransaction;

·                  the discount rate applied to future earnings,based on an estimate of the cost of capital;

·                  the potential future earnings of thereporting unit;

·                  the relative weight given to the valuationsderived by the three methods described.

If step 1 indicates apotential impairment of a reporting unit, step 2 requires us to estimate the“implied fair value” of the reporting unit. This process estimates the fair value of the unit’s individual assetsand liabilities in the same manner as if a purchase of the reporting unit weretaking place.  To do this we mustdetermine the fair value of the assts, liabilities and identifiable intangibleassets of the reporting unit based upon the best available information. If thevalue of goodwill calculated in step 2 is less than the carrying amount ofgoodwill for the reporting unit, an impairment is indicated and the carryingvalue of goodwill is written down to the calculated value.

Since estimates are anintegral part of the impairment computations, changes in these estimates couldhave a significant impact on any calculated impairment amount.  Factors that may significantly affect theestimates include, among other, competitive forces, customer behaviors andattrition, changes in revenue growth trends, cost structures and technology,changes in discount rate, changes in stock and mergers and acquisitions marketvalues and changes in industry or market sector conditions.

During the first quarter of2007, we performed our annual goodwill impairment evaluation for the entireorganization effective December 31, 2006. Step 1 was performed by using both market value and transaction valueapproaches for all reporting units and, in certain cases; the discounted cashflow approach was also used.  In themarket value approach, we identified a group of publicly traded banks that aresimilar in size and 

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location to our subsidiarybank and then used valuation multiples developed from the group to apply to oursubsidiary companies.  In the transactionvalue approach, we reviewed the purchase price paid in recent mergers andacquisitions of banks similar in size to our subsidiary companies.  From these purchase prices we developed a setof valuation multiples, which we applied to our subsidiary companies.  In instances where the discounted cash flowapproach was used, we discounted projected cash flows to their present value toarrive at our estimate of fair value.

Upon completion of step 1 ofthe evaluation process, we concluded that no potential impairment existed forany of the Company’s reporting units.  Inreaching this conclusion, we determined that the fair values of goodwillexceeded the recorded values of goodwill. Since this evaluation process required us to make estimates andassumptions with regard to the fair value of the Company’s reporting unites,actual values may differ significantly from these estimates.  Such differences could result in future impairmentof goodwill that would, in turn, negatively impact the Company’s results ofoperations and the business segments where the goodwill is recorded.  However, had our estimated fair values been10% lower, there would still have been no indication of impairment for any ofour reporting units.

In November 2006 the Companycompleted its merger with NNB Holdings, Inc. which results in an increase ingoodwill of approximately $23 million. The goodwill will be evaluated for impairment as part of the Company’s2007 annual goodwill impairment evaluation.

**ITEM 1A.               RISK FACTORS**

ThisAnnual Report on Form 10-K includes forward-looking statements and informationand is subject to the “safe harbor” provisions of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements (whichinvolve The Bank Holdings’ (the “Company’s”) plans, beliefs and goals, refer toestimates or use similar terms) involve certain risks and uncertainties thatcould cause actual results to differ materially from those in theforward-looking statements.

In addition, our businessexposes us to certain risks.  The factorscontained below, among others, could cause our financial condition and resultsof operations to be materially and adversely affected.  If this were to happen, the value of ourcommon stock could decline, perhaps significantly.

·     changes in the extensive laws, regulationsand policies governing financial institution holding companies and theirsubsidiaries could alter our business environment or affect our operations;

·                  generaleconomic or industry conditions could be less favorable than expected,resulting in a deterioration in credit quality, a change in the allowance forloan losses or a reduced demand for credit or fee—based products and services;

·                  concentrationsof real estate loans could subject us to increased risk in the event of a realestate recession or natural disaster;

·                  changesin the domestic interest rate environment could reduce net interest income andcould increase credit losses;

·                  theconditions of the securities markets could change, which could adverselyaffect, among other things, the value or credit quality or our assets, theavailability and terms of funding necessary to meet our liquidity needs and ourability to originate loans and leases;

·                  competitivepressures could intensify and affect our profitability, including as a resultof continued industry consolidation, the increased availability of financialservices from non—banks, technological developments such as the internet, orbank regulatory reform;

·                  lossof key personnel, social or demographic displacements;

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·                  thepotential need to adapt to industry changes in information technology systems,on which we are highly dependent, could present operational issues or require significantcapital spending;

·                  operationalrisks and interruptions including data processing systems failure or fraud;

·                  ourinvestments in our businesses and in related technology could requireadditional incremental spending, and might not produce expected deposit andloan growth and anticipated contributions to our earnings;

·                  acquisitionsmay result in large one—time charges to income, may not produce revenueenhancements or cost savings at levels or within time frames originallyanticipated and may result in unforeseen integration difficulties;

·                  wemay have difficulty managing our growth, which depends on monitoring andmanaging expanded operations, staffing, and customer relations;

·                  weoperate in a competitive environment dominated by larger financial serviceproviders who have lower cost structures and offer a wider panoply of services;

·                  actsor threats of terrorism or actions taken by the United States or othergovernments as a result of such acts or threats, including possible militaryaction, could further adversely affect business and economic conditions in theUnited States generally and in our principal markets, which could have anadverse effect on our financial performance and that of our borrowers and onthe financial markets and the price of our common stock;

Youshould not place undue reliance on any forward—looking statements.  Forward—looking statements speak only as ofthe date they are made, and we undertake no obligation to update them in lightof new information or future events except to the extent required by federalsecurities laws.

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

Thereare no comments received from Securities and Exchange Commission staffregarding our periodic or current reports that are unresolved.

**ITEM2.     PROPERTIES**

The Company currentlyoperates from ten locations, the principal location being 9990 Double RBoulevard, Reno, Nevada, 89521 where the administrative functions and regularbranch activities of the bank occur.  TheBank Holdings is also located at this address. Company facilities are of various ages and correspondingly requiredifferent levels of maintenance.  All aresuitable and adequate for their intended use.

Nevada Security Bank leasesthe first floor of this free-standing facility under an agreement dated October2, 2001, which notes the use of approximately 9,300 square feet for a ten-yearterm beginning at the issuance of a certificate of occupancy.  Nevada Security Bank took possession onDecember 6, 2002 and may extend the lease for four, five-year periods if not indefault under the terms of the agreement at each renewal period.  The lease payment under this agreement isapproximately $9,600 per month with annual escalations for each of the firstfour years; beginning in year five there is a fixed annual escalation of 2.5%.

Nevada Security Bank alsoleases part of the second floor of this free-standing facility under anagreement dated May 1, 2005, which notes the use of approximately 1,686 squarefeet for a seven-year six month term the expiration of which is coterminouswith the lease on the first floor. Nevada Security Bank took possession on May 1, 2005 and the lease termsare the same as the lease for the first floor. The lease payment under this 

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agreement is approximately$2,765 per month with annual escalations for each of the first four years;beginning in year five there is a fixed annual escalation of 2.5%.

The Bank Holdings leasespart of the second floor of the same facility under an agreement dated November17, 2003, which notes the use of approximately 4,028 square feet for an eightyear eight month term which is also coterminous with the Bank’s leases.  The Bank Holdings took possession on April 9,2004 and may extend the lease for four, five-year periods if not in defaultunder the terms of the agreement at each renewal period.  The lease payment under this agreement isapproximately $5,720 per month with annual escalations for each of the firstthree years; beginning in year four there is a fixed annual escalation of 2.5%.

Nevada Security Bank’sIncline Village branch office operates in approximately 4,200 square feet in anoffice at the northeast end of the Raley’s Shopping Center located at 910 TahoeBoulevard, Incline Village, Nevada, 89451. Nevada Security Bank renovated this property and took possession onMarch 6, 2003 under a five-year lease dated February 26, 2001 that contains tworenewal periods of five years each if the bank is not in default under theterms of the lease at each renewal period. The bank and the lessors of the property have agreed to both extensionsof the lease, under the renewal terms as were previously documented. The leasepayment under this agreement is approximately $7,056 per month with annualconsumer price index (CPI) adjustments.

Nevada Security Bank’sMaeAnne office in Northwest Reno operates in approximately 3,500 square feet ina newly constructed free standing building in the McQueen’s Crossings shoppingcenter development.  Nevada Security Bankoccupies this facility under a lease agreement dated October 7, 2003 within aland area of about 46,000 square feet. The location consists of a building, three drive-up lanes, one of whichhouses an ATM, and one bypass lane.  The termof the lease is twenty years, commencing October 11, 2004, with two ten yearextensions available if the tenant is not in default under the terms of thelease.  The lease payment under thisagreement is approximately $11,250 per month for the first five years, withescalations thereafter.

The Bank also occupies theformer head office location of Northern Nevada Bank, acquired on November 6,2006.  This property is owned by the Bankand includes a 10,784 square foot two story building on a site area of .99acres at 3490 S. Virginia Street, Reno, NV 89505.  This property was originally one story of5,064 square feet, but was improved during 2004 to add a 5,720 square foot twostory addition.  The property wasappraised in December 2006 at $2.6 million and is used as a retail bankingfacility.

The second branch acquiredduring November, 2006 is the Carson office, located at 3120 Highway 50 East #1,Carson City, NV  89706.  This facility is 2,552 square feet operatingunder a five year triple net lease which was signed on June 14, 2004 andcommenced on May 1, 2005.  The lease hastwo five year extension provisions, and common area operating costs are basedon a 16% factor.  The rent wasestablished at $4,721.20 per month with a $0.10 per square foot increase on the25th monthof the term, and another such increase on the 49th month of the term.

The third location acquiredis the Information Technology and Operations Center, located at 5450 RigginsCourt, Suite 5, Reno, NV  89515.  The facility is 5,138 rentable square feetwith approximately 3,500 square feet used for operations and 1,600 square feetused as warehouse storage.  The lease isdated August 11, 2000 and extends for ten years with a base rate of $0.65 persquare foot.  The property has an annualCPI adjustment commencing September 1 of each year, based on the San Francisco— Oakland California regional area index as published by the BLS.  There are two five year options to renew,within the body of the agreement, which is a triple net lease with a CAM chargebase of 16.6%.

Additionally, in theacquisition, the Bank became the owner of a 2.41 acre vacant lot located inSparks, NV.  This parcel is locatedadjacent east of Queens Way Lane with approximately 534 feet of frontage onPyramid Highway, north of McCarran Blvd. The property is zoned PO — professional office and is considered to bean

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 infill site, as most of the surrounding landhas been developed.  During December 2006the property was appraised for $1.6 million.

The Spanish Springs branchoffice in Sparks, Nevada opened late in the first quarter of 2006, in atemporary location. The permanent location has been delayed due to sitecompletion activities.  When open it willbe housed in a free standing building in a shopping center development, whichis currently pending governmental site development approval.  This temporary lease site is for one year, isdated February 1, 2006 for 1471 rentable square feet with six months at$2,353.60 per month base rent and months 7 - 18 on a month to month at the samerate.

In addition, Nevada SecurityBank opened a branch office at 2270 Douglas Blvd., Suite 220 Roseville,California under the name Silverado Bank, a division of Nevada SecurityBank.  The Roseville facility is newlyrenovated and operates under a lease dated October 6, 2004 with premises ofapproximately 5,968 square feet.  Theterm of the lease is five years, commencing with occupancy in March 2005, withone five year extension available if the tenant is not in default under theterms of the lease.  The lease paymentunder this agreement is approximately $12,533 per month for the first year,with escalations thereafter.

A further branch ofSilverado Bank is in the process of being established at 2865 Sunrise Blvd,Suite 100, Rancho Cordova, CA.  Theproperty has 7,500 rentable square feet in a two story building under a fiveyear term which lease is dated May 5, 2006, however, which is expected tocommence in April, 2007, due to permitting and remodeling delays.  The base rent is established at $1.40 persquare foot, with an annual $0.05 per foot escalation and a tenant pro rata CAMbase of 16.66%.  The agreement has twofive year option periods, subject to the tenant not being in default under anylease provisions.

Nevada Security Bank’s totaloccupancy expense for the years ended December 31, 2006 and 2005 wasapproximately $1,643,000 and $1,532,000 respectively.  Management believes that existing facilitiesare adequately covered by insurance and sufficient for our present purposes andanticipated growth in the foreseeable future.

The Company’s 1031 officesare operated as Rocky Mountain Exchange at 1087 Stoneridge Drive, Bozeman,Montana and Granite Exchange, Inc. at 1400 Rocky Ridge Drive, Suite 280,Roseville, CA.

The Bozeman, Montanaproperty is newly constructed and operates under a three year lease datedOctober 11, 2006 for 954 rentable square feet. Occupancy started in November 2006 under a triple net lease with anability to extend for a five year period if tenant is not in default.  The lease payment under this agreement is$13.00 per square foot per year with no escalation, same pro-rata common areamaintenance charges.

The Granite Exchangelocation is a new two story building constructed during 2005, commonly calledthe Rocky Ridge Corporate Center.  Theproperty is 2,776 rentable square feet available under a five year lease datedApril 12, 2005 with occupancy started August 2005.  The monthly rent per square foot is $2.35with annual escalations of $0.05 per year, and monthly payments of pro-rataoperating expenses.  The agreement hastwo available three year options to extend, provided tenant is not in defaultunder any terms or conditions of occupancy.

The Company’s 1031 divisionoccupancy expense for the year ended December 31, 2006 was approximately$114,000.  Management believes that suchfacilities as currently house these two subsidiary 1031 QI entities areadequately covered by insurance and sufficient for the present activities ofthe two operating units and their anticipated growth during the foreseeablefuture.

The Company maintains insurance coverage on all premises describedabove, and there are no known likely trends or uncertainties in future rent oramortization expense that could materially affect the Company’s cash flows.

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**ITEM3.     LEGAL PROCEEDINGS**

With the exception of the matters disclosed below, in the normal course of business, the Companyis involved in various legal proceedings. In the opinion of management, any liability resulting from suchproceedings would not have a material adverse effect on the Company’s financialcondition or results of operation.

In November, 2004, Dot1Web,Inc., Thomas R. Creal, court appointed receiver for Dot1Web, Inc. and RobertDeMaio filed an action against Nevada Security Bank, the Company’s solesubsidiary.  The Bank Holdings is not aparty to this lawsuit.  The centralallegation against the Bank is the alleged wrongful dishonor of certain checksdrawn on the account of Plaintiff.  ThePlaintiffs alleged that, as a result of the dishonor, they lost potentialinvestors who were planning on assisting them with $20,000,000 in capitalinvestment and Mr. Demaio also personally lost nearly $80,000,000 in the valueof stock he held in Dot1Web, Inc.

On March 10, 2006, in theSecond Judicial District Court of the State of Nevada, in and for the County ofWashoe, an order was issued dismissing the plaintiff’s complaint withprejudice.

**ITEM4.     SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

No substantive matters weresubmitted to a vote of the security holders during the fourth quarter of theperiod covered by this report, except for the special shareholders meeting heldon October 4, 2006 for the purpose of approving the purchase and mergertransaction between NNB Holdings and its subsidiary Northern Nevada Bank, andthe Bank Holdings and its subsidiary, Nevada Security Bank and other mattersthat may have properly come before the meeting.

**PART II**

**ITEM5.     MARKET FOR COMMON EQUITY ANDRELATED SHAREHOLDER MATTERS**

**(a)  Market Information**

Between December 27, 2001the date the Bank opened for business, and March 22, 2004, there were no tradesin the Bank’s stock of which management is aware, and there appeared to be noactive trading market.

The Company’s Common Stock was listed on the NASDAQ Small Cap Market onMarch 23, 2004.  Prior to that, NevadaSecurity Bank’s Common Stock was listed on the Over-The-Counter Bulletin Board(OTCBB).  Our Common Stock trades on theNASDAQ Stock Market® under the symbol TBHS and the CUSIP number of such commonstock is 88331E104.

29

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| **Calendar Quarter ** | ** ** | **Sale Price of the Company’s  Common Stock (per share) ** | ** ** | **Approximate Trading ** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **Ended**                       | ** ** | **High**                                                                                                | ** ** | **Low**                            | ** ** | **Volume in Shares** | ** ** |
| March 31, 2004  (1)             |       | $                                                                                                       | 15.94      |                               | $          | 13.24 |   | 319,770 |   |
| June 30, 2004                   |       | 16.90                                                                                                   |       | 13.50                              |       | 217,439 |   |
| September 30,  2004             |       | 17.24                                                                                                   |       | 15.50                              |       | 51,343 |   |
| December 31,  2004              |       | 20.70                                                                                                   |       | 15.75                              |       | 97,508 |   |
| March 31, 2005                  |       | 20.47                                                                                                   |       | 17.55                              |       | 114,194 |   |
| June 30, 2005                   |       | 19.48                                                                                                   |       | 16.10                              |       | 173,475 |   |
| September 30,  2005             |       | 19.48                                                                                                   |       | 18.10                              |       | 302,974 |   |
| December 31,  2005              |       | 18.95                                                                                                   |       | 17.24                              |       | 255,136 |   |
| March 31, 2006                  |       | 17.35                                                                                                   |       | 17.23                              |       | 78,875 |   |
| June 30, 2006                   |       | 18.09                                                                                                   |       | 18.09                              |       | 141,411 |   |
| September 30,  2006             |       | 17.85                                                                                                   |       | 17.74                              |       | 151,531 |   |
| December 31, 2006               |       | 18.71                                                                                                   |       | 18.10                              |       | 122,468 |   |
|                                 |            |                                                                                                         |            |                                    |            |  |  |  |  |

 

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 (1) Trading commenced March 23, 2004.

**THE BANK HOLDINGSTotal Return Performance**
| ** **                | ** ** | **Period Ending** | ** ** |
|---------------------------|------------|------------------------|------------|
| **Index**                 | ** ** | **3/23/04**            | ** ** | **12/31/04** | ** ** | **6/30/05** | ** ** | **12/31/05** | ** ** | **6/30/06** | ** ** | **12/31/06** | ** ** |
| The Bank  Holdings        |       | 100.00                 |       | 142.76 |   | 134.34 |   | 136.50 |   | 137.50 |   | 137.59 |   |
| SNL Bank Index            |       | 100.00                 |       | 110.85 |   | 106.69 |   | 112.36 |   | 117.92 |   | 131.43 |   |
| NASDAQ Composite          |       | 100.00                 |       | 114.88 |   | 109.00 |   | 117.38 |   | 116.15 |   | 129.58 |   |
| SNL <$500M  Bank Index |       | 100.00                 |       | 109.64 |   | 108.70 |   | 116.08 |   | 119.64 |   | 121.95 |   |
|                      |       |                   |       |   |   |   |   |   |   |   |   |   |   |

 
| Source: SNL Financial LC, Charlottesville, VA | (434) 977-1600 |
|-----------------------------------------------|----------------|
| © 2007                                   | www.snl.com    |

 

Management is aware of the following securities dealers who make amarket in the Company’s stock:  D.A.Davidson & Co., Two Centerpointe Dr., Suite 400, Lake Oswego, OR  97035, phone number 800-249-2610 attn: CindyBurg; Howe Barnes Investments Inc., 135 South LaSalle Street, Chicago, IL  60603, phone number 

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312-655-3000; attn: GlennHarris, and Mitchell Securities Corporation of Oregon, 121 S.W. Morrison St.,Suite 1060, Portland, OR  97204, phonenumber 800-224-2226 attn: Mitch Almy, (the “Securities Dealers”).

The Company has not made anyrepurchases of its stock during the fourth quarter of the period covered bythis report.

**(b)  Holders**

On March 21, 2007 totalshareholders of record are 1,329.  Therewere approximately 591 individual shareholders while street name holderstotaled about 738.

**(c)  Dividends**

As a bank holding companywhich currently has no significant assets other than our 100% ownership ofNevada Security Bank and our 100% ownership of Rocky Mountain Exchange as wellas our 75% (during January 2007 this ownership was increased to 80%) ownershipof Granite Exchange, our ability to pay cash dividends depends upon thedividends we receive from our subsidiaries. The dividend practice of Nevada Security Bank and our QI’s, like ourdividend practice, will depend upon their earnings, financial condition andother relevant factors, including applicable regulatory orders and restrictionswith respect to dividends.

Nevada Security Bank’sability to pay cash dividends to us is also subject to certain legallimitations.  Under Nevada law, a bankcannot declare a cash dividend or make a distribution of its net profits until(a) the bank’s surplus fund equals its initial stockholders’ equity (excludingthe amount of the initial surplus fund) and (b) ten percent of the previousyear’s net profits have been carried to the surplus fund.  Additionally, no distribution may be made ifit would result in the bank’s stockholders’ equity (including the reserve forloan losses) being less than 6% of the bank’s average total daily depositliabilities for the preceding 60 days or if it would reduce the stockholders’equity below the initial stockholders’ equity or below minimum applicableregulatory capital requirements under federal law.  Also, under Nevada law applicable to NevadaSecurity Bank, and to Nevada corporations generally, no distribution may bemade if, after giving effect to it, the corporation would be unable to pay itsdebts as they become due in the usual course of business or the sum of thecorporation’s assets would be less than the sum of its liabilities plus theamount (if any) that would be needed to satisfy the rights of holders of anypreferred stock of the corporation, assuming the corporation were to bedissolved at the time of the distribution.

Stock dividends are notsubject to the Nevada law restrictions or distributions, as described above,because a corporation’s assets, liabilities and total stockholders’ equity donot change as a result of the stock dividend.

During the first quarter of2007, the Company declared a five percent (5%) stock dividend payable toshareholders as of February 15, 2007. The Company previously declared a five percent (5%) stock dividendduring 2005 payable to shareholders as of December 8, 2005.

Shareholders are entitled toreceive dividends only when and if declared by our board of directors and wehave no intention to pay cash dividends in the foreseeable future.  Instead, any earnings which may be generatedwill be retained for the purpose of increasing our capital and reserves inorder to facilitate growth.

During any period in whichthe Company has deferred payment of interest otherwise due and payable on itssubordinated debt securities, it may not make any dividends or distributionswith respect to its capital stock (see “Item 7 Management’s Discussion andAnalysis of Financial Condition and Results of Operations — Capital Resources”).

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**(d)  Securities Authorized for Issuance underEquity Compensation Plans**

The following table providesinformation as of December 31, 2006, with respect to options outstanding andavailable under our Stock Option Plan, which is our only equity compensationplan other than an employee benefit plan meeting the qualification requirementsof Section 401(a) of the Internal Revenue Code:

Equity Compensation Plan Information
| **Plan Category**                                      | ** ** | **Number of Securities to   be issued upon exercise   of outstanding options,   warrants and rights** | ** ** | **Weighted-average   exercise price of  outstanding options,   warrants and rights** | ** ** | **Number of Securities   remaining available for   future issuance under   equity compensation   plans (excluding   securities reflected in   column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  Compensation plans approved by security holders     |       | 659,935                                                                                                                                                                |       | $                                                                                                                       | 12.83      |                                                                                                                                                                                                                                             | 483,769    |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                                                 |       | —                                                                                                                  |       | —                                                                                                                                                                                                                                           |       |
|                                                        |       |                                                                                                                                                                   |       |                                                                                                                    |       |                                                                                                                                                                                                                                             |       |
| Total                                                       |       | 659,935                                                                                                                                                                |       | $                                                                                                                       | 12.83      |                                                                                                                                                                                                                                             | 483,769    |   |

 

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**ITEM6.  SUMMARY SELECTED CONSOLIDATEDFINANCIAL DATA**

 
| ** **                                   | ** ** | **Year Ended December 31,**                                      | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                                        | ** ** | **2005 (1)** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| ** Condensed Income Statement**         | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  Interest Income                        |       | $                                                                               | 31,039     |   | $ | 17,166 |   | $ | 10,536 |   | $ | 5,250 |   | $ | 1,948 |   |
|  Interest Expense                       |       | 15,083                                                                          |       | 7,344 |   | 3,669 |   | 1,893 |   | 759 |   |
| Net Interest Income                          |       | 15,956                                                                          |       | 9,822 |   | 6,867 |   | 3,357 |   | 1,189 |   |
|  Provision for Loan Losses              |       | 771                                                                             |       | 1,069 |   | 764 |   | 602 |   | 220 |   |
|  Non-interest income                    |       | 1,682                                                                           |       | 772 |   | 420 |   | 893 |   | 77 |   |
|  Non-interest expense                   |       | 13,582                                                                          |       | 8,823 |   | 6,242 |   | 4,213 |   | 2,811 |   |
| Attributable to  minority shareholders       |       | 127                                                                             |       | — |   | — |   | — |   | — |   |
|  Provision for income taxes             |       | 1,075                                                                           |       | (710 | ) | — |   | — |   | — |   |
| Net Income (Loss)                            |       | $                                                                               | 2,083      |   | $ | 1,412 |   | $ | 281 |   | $ | (565 | ) | $ | (1,765 | ) |
|                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |
| ** Period End Data**                    | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  Assets                                 |       | 651,540                                                                         |       | 384,632 |   | 246,842 |   | 166,149 |   | 79,676 |   |
|  Loans, gross                           |       | 463,859                                                                         |       | 245,185 |   | 160,708 |   | 82,671 |   | 25,005 |   |
|  Securities                             |       | 92,927                                                                          |       | 83,821 |   | 69,128 |   | 74,763 |   | 47,992 |   |
|  Deposits                               |       | 496,997                                                                         |       | 338,198 |   | 188,341 |   | 148,747 |   | 67,270 |   |
|  Other borrowed funds                   |       | 60,149                                                                          |       | 15,464 |   | 30,500 |   | 6,125 |   | 15 |   |
|  Shareholders’ Equity              |       | 73,456                                                                          |       | 28,702 |   | 27,376 |   | 10,853 |   | 11,995 |   |
|                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |
| ** Average Balance Sheet**              | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  Assets                                 |       | 452,179                                                                         |       | 293,580 |   | 233,439 |   | 121,017 |   | 46,903 |   |
|  Loans, gross                           |       | 308,411                                                                         |       | 201,267 |   | 122,454 |   | 50,214 |   | 8,318 |   |
|  Securities                             |       | 91,736                                                                          |       | 69,668 |   | 90,242 |   | 59,998 |   | 25,333 |   |
|  Deposits                               |       | 359,932                                                                         |       | 245,322 |   | 199,305 |   | 108,163 |   | 34,209 |   |
|  Shareholders’ Equity              |       | 41,256                                                                          |       | 28,061 |   | 23,090 |   | 11,188 |   | 12,573 |   |
|                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |
| ** Asset Quality**                      | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  Non-performing assets (2)              |       | 549                                                                             |       | — |   | — |   | — |   | — |   |
|  Allowance for loan losses              |       | 5,430                                                                           |       | 2,655 |   | 1,586 |   | 822 |   | 220 |   |
|  Net Charge-offs                        |       | —                                                                          |       | — |   | — |   | — |   | — |   |
|  Non-performing assets to total assets  |       | 0.08                                                                            | %          | — |   | — |   | — |   | — |   |
|  Allowance for loan losses to loans     |       | 1.17                                                                            | %          | 1.08 | % | 0.99 | % | 0.99 | % | 0.88 | % |
|  Net Charge-offs to average loans       |       | —                                                                          |       | — |   | — |   | — |   | — |   |
|                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |
| ** Per Common Share**                   | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  Basic income (loss) per share          |       | 0.51                                                                            |       | 0.45 |   | 0.10 |   | (0.36 | ) | (1.14 | ) |
|  Diluted income (loss) per share        |       | 0.49                                                                            |       | 0.41 |   | 0.09 |   | (0.36 | ) | (1.14 | ) |
|  Book value per share at year end       |       | 12.62                                                                           |       | 9.19 |   | 9.21 |   | 7.72 |   | 8.53 |   |
|  Period end common outstanding *        |       | 5,831,099                                                                       |       | 3,280,479 |   | 3,120,947 |   | 1,476,227 |   | 1,476,227 |   |
|  Average shares outstanding - basic *   |       | 4,117,351                                                                       |       | 3,122,809 |   | 2,884,131 |   | 1,550,039 |   | 1,549,937 |   |
|  Average shares outstanding - diluted * |       | 4,290,122                                                                       |       | 3,443,856 |   | 2,980,938 |   | 1,550,039 |   | 1,549,937 |   |
|                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |
| ** Financial Ratios**                   | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  Return on average assets               |       | 0.46                                                                            | %          | 0.48 | % | 0.12 | % | (0.47 | )% | (3.76 | )% |
|  Return on average equity               |       | 5.05                                                                            | %          | 5.03 | % | 1.22 | % | (5.05 | )% | (14.04 | )% |
|  Net interest margin (3)                |       | 3.81                                                                            | %          | 3.49 | % | 3.12 | % | 2.91 | % | 2.65 | % |
|  Tier 1 leverage capital ratio          |       | 9.85                                                                            | %          | 10.06 | % | 11.01 | % | 7.06 | % | 15.17 | % |

 

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* Adjusted for Stock Dividends of February 15, 2007 and December 28,2005 

(1)  The Company removed the valuation allowanceon deferred tax assets, and incurred franchise taxes on its allocatedCalifornia income.

(2)  Non-performing assets consists of loans 90days or more delinquent and still accruing interest, investments or loansplaced on non-accrual status, and other real estate owned.

(3)  Net interest income calculated on a fullytaxable equivalent basis divided by average interest earning assets.

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**ITEM 7.     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**INTRODUCTION**

Thefollowing provides Management’s comments on the financial condition and resultsof operations of The Bank Holdings and its subsidiaries.  Unless otherwise stated, “the Company” refersto this consolidated entity and “we” refers to the Company’s Management. Youshould read this discussion in conjunction with the Company’s ConsolidatedFinancial Statements and the notes to the Consolidated Financial Statements.

The“summary selected consolidated financial data” that preceeds is derived fromthe audited Consolidated Financial Statements of the Company and from ourinternal accounting system.  The selectedfinancial data should be read in conjunction with the audited ConsolidatedFinancial Statements and Notes thereto, and Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

Thisdiscussion presents management’s analysis of the financial condition and resultof operations of The Bank Holdings, Nevada Security Bank, and the Company’s1031 QI division, for each of the periods ended December 31, 2006, 2005, and2004 and includes the statistical disclosures required by SEC Guide 3 (“StatisticalDisclosure by Bank Holding Companies”). The discussion should be read in conjunction with the financialstatements of The Bank Holdings, Nevada Security Bank, and the 1031 division,and the notes related thereto which appear elsewhere in this document.

**Critical Accounting Policies**

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States.  The financial information contained withinthese statements is, to a significant extent, based on approximate measures ofthe financial effects of transactions and events that have alreadyoccurred.  Critical accounting policiesare those that involve the most complex and subjective decisions andassessments, and have the greatest potential impact on the Company’s statedresults of operations.  In Management’sopinion, the Company’s critical accounting policies deal with the followingareas:  the establishment of the Company’sallowance for loan losses, as explained in detail in the “Provision for LoanLosses” and “Allowance for Loan Losses” sections of this discussion andanalysis; loan origination costs, which are estimated and aggregated by loantype based on a regular evaluation of expenses (primarily salaries andbenefits) associated with successful loan originations and are allocated toindividual loans as they are booked, but can actually vary significantly forindividual loans depending on the characteristics of such loans; income taxes,especially with regard to the ability of the Company to recover deferred tax assets,as discussed in the “provision for income taxes” and “other assets” sections ofthis discussion and analysis; goodwill, which is evaluated annually forimpairment based on changes in the market value of subsidiary organizations;and equity-based compensation, which is discussed in greater detail in Footnote1 “Basis of Presentation” to the financial statements contained herein, underthe caption “Stock Compensation Plan”. Critical accounting areas are evaluated on an ongoing basis to ensurethat the Company’s financial statements incorporate the most recentexpectations with regard to these areas.

**Allowance for Loan Losses**

Ourallowance for loan loss methodology incorporates a variety of riskconsiderations, both quantitative and qualitative in establishing an allowancefor loan loss that management believes is appropriate at each reportingdate.  Quantitative factors include ourhistorical loss experience, peer bank loss experience, delinquency andcharge-off trends, collateral values, changes in nonperforming loans, loanconcentrations and other factors. Qualitative factors include the general economic conditions in ourmulti-state locations, and in particular, the state of certain industries innorthern Nevada and northern California. Size and complexity of individualcredits in relation to loan structure, existing loan policies and pace ofportfolio growth are other qualitative factors that are considered in themethodology.  As we add new products andincrease the complexity of our loan portfolio, we enhance our methodologyaccordingly.  Management may report amaterially different amount for the provision for loan losses in the statementof operations to change the balance of the allowance for loan losses if 

34

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itsassessment of the above factors were different. This discussion and analysis should be read in conjunction with ourfinancial statements and the accompanying notes presented elsewhere herein aswell as the portion of this Management’s Discussion and Analysis sectionentitled “Provision for Loan Losses” and “Allowance for Loan Losses”. Althoughmanagement believes the levels of the allowance as of December 31, 2006 and2005 were adequate to absorb probable losses inherent in the loan portfolio, adecline in local economic conditions, or other factors, could result inincreasing losses that cannot be reasonably predicted at this time.

**DeferredTax Assets**

TheCompany’s deferred tax assets are explained in Note 9.  The Company uses an estimate of futureearnings to support its position that the benefit of its deferred tax assetswill be realized.  If future incomeshould prove non-existent or not sufficient to recover the amount of thedeferred tax assets within the tax years to which they may be applied, theassets will not be realized and the Company’s net income will be reduced.

TheCompany’s pretax income for 2006 was $3.3 million, two times the net deferredtax asset of $1.7 million.  Consequently,the Company considers it more likely than not that the Company will be able toutilize the deferred tax assets in the normal course of business.

**Goodwilland other intangible assets**

TheCompany has recorded approximately $31 million in goodwill and other intangibleassets arising from business combinations. The Company must assess goodwill and other intangible assets each yearfor impairment.  This assessment involvesestimating cash flows for future periods, preparing unit to which the goodwillis allocated.  If the future cash flowswere materially less than the estimates, the Company would be required to takecharge against earnings to write down the asset to the lower fair value.  Goodwill and other intangible assets were notimpaired as of December 31, 2006 or 2005.

**BusinessCombinations**

Assetsand liabilities acquired in business combinations are recorded at fairvalue.  The Company uses a variety ofmethodologies to estimate these fair values. In general the methodologies are the same as those used in determiningthe fair value of assets and liabilities as are described in Note 16.  The fair value of most financial assets andliabilities are determined by discounting the anticipated cash flows from orfor the instrument using current market rates applicable to each category ofinstrument.  Where market quotes may beavailable as in the case of securities, these are used in reference toestimates determined by discounting cash flows. Because the excess of consideration paid in the business combinationover the fair value of the net assets is recorded as goodwill, errors in theestimation process of the fair value of acquired assets and liabilities willresult in an overstatement or understatement of income and expenses and, in thecase of an overstatement of goodwill, could make the Company more subject to animpairment charge when the overstatement is discovered in its annual assessmentfor impairment.

**Estimatesof the fair value of assets**

Certainassets of the Company are recorded at fair value, or the lower of cost or fairvalue.  In some cases, the fair valueused is an estimate.  Included amongthese assets are securities that are classified as available-for-sale, goodwilland other intangible assets, and other real estate owned and impairedloans.  These estimates may change fromperiod to period as they are impacted by changes in interest rates and othermarket conditions.  Losses notanticipated or greater than anticipated could result if the Company were forcedto sell one of these assets and discovered that its estimate of fair value hadbeen too high.  Gains not anticipated orgreater than anticipated could result if the Company were to sell one of theseassets and discover that its estimate of fair value had been too low.

**OVERVIEW**

TheCompany earns income from two primary sources; net interest income generated bythe successful employment of earning assets less the costs of interest-bearingliabilities, and net non-interest income, which is generated by service chargesand fees charged for services provided, less the operating costs of providingthe full range of banking and other financial services to our customers.  Income on bank owned life insurance and 

35

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pre-underwritingloan fees, gains on sale of securities and unrealized gains or losses on theCompany’s trading account comprise other primary areas of non-interest income.

**Summary: Results of Operations 2006 Over 2005**

As previously noted and also as reflected in the ConsolidatedStatements of Operations, for the year ended December 31, 2006, the Companygenerated after tax net income of approximately $2.1 million and for the yearsended December 31, 2005 and 2004, the Company generated net income ofapproximately $1.4 million, and approximately $281,000, respectively.  Basic and diluted earnings per share for theyear ended December 31, 2006 was $0.51 and $0.49 compared with basic anddiluted earnings per share of $0.45 and $0.41 for the year ended December 31,2005.  The Company’s annual return onaverage equity was 5.05% and annual return on average assets was 0.46% for theyear ended December 31, 2006, compared to 5.03% and 0.48% respectively, for thesame period of 2005.  There were a numberof monetary and non-monetary events that occurred during 2006 that had animpact on the reported performance of the Company.  The monetary events that resulted insignificant changes in the Company’s reported performance include thesubstantial growth of assets under management, the increase in short termfunding costs during the past year, being in a fully taxable position this yearas compared to the removal of a valuation allowance against deferred tax assetsduring 2005 and the addition of $42.9 million in new capital for theCompany.  The significant non-monetaryevents include the acquisition of the 1031 financial intermediaries during thefirst quarter of 2006 and the purchase and merger with NNB Holdings andNorthern Nevada Bank in November of 2006. In addition, we opened a new branch office in Sparks, Nevada, and havean approved but unopened office in Rancho Cordova, CA. which is scheduled toopen during the second quarter of 2007. The Company in conjunction with the purchase and merger of NNB Holdingsand Northern Nevada Bank also converted its data processing structure from aservice bureau to an in-house processing system.

Theprimary drivers behind the variance in net income for the year of 2006 relativeto 2005 are as follows:

·     Net interest income after provision for loanlosses increased by $6.4 million or 73.5%, due primarily to an increase of$60.8 million more of average interest earnings assets than average interestpaying liabilities.  Average earningassets increased $137.2 million or 48.8%. Average interest bearing liabilities increased $80.1 million or 28.9%.

·     The Company recorded $448,000 in exchange feeincome and there was no similar item in 2005.

·     Unrealized gains on trading equities amountedto $443,000 for 2006 compared to $47,000 for the year of 2005.

·     Salaries and benefits increased $3.4 millionor 80.4%.  This increase reflects theadditional FTE staff in 2006 compared to 2005.

·     Occupancy expenses increased $389,000 or25.4% due to the acquisition of the 1031 intermediaries, the merger with NNBHoldings, Inc and the opening of another branch during 2006.

·     Data processing costs increased $227,000 or31.0%, due to the merger with NNB and the transition to in-house dataprocessing versus using a service bureau.

·     All other expenses increased $748,000 or32.0%.

·     The Company’s weighted average prime rate forthe years 2006, 2005 and 2004 was 7.96%, 6.19%, and 4.34%, respectively.

**2005 over 2004**

Thestrong improvement in results of operations for the year ended December 31,2005 when compared to the results of the comparable 2004 period, are primarilydue to increases in volumes held of interest earning assets, and interestbearing liabilities.  Total assetsincreased $137.8 million or 55.8% when comparing December 31, 2005 to 2004, andaverage total assets increased about $60.1 million or 25.8% over the sameperiod.

TheCompany’s income from operations was approximately $1.4 million for the yearended December 31, 2005 as compared to $281,000 for the comparable period in2004.  This was a change of approximately$1.1 million from the previous period. The income per basic share was $0.45 for 2005, as compared to $0.10 for2004.  The 

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Company’sreturn on averages assets (ROAA) was 0.48% and the return on average equity(ROAE) was 5.03%, as compared to 0.12% and 1.22% respectively, for 2004.

Therewere a number of monetary and non-monetary events that occurred during the year2005 that had an impact on the reported performance of the Company.  The monetary events that prompted significantchanges in the Company’s reported performance include the substantial growth ofassets under management, the actions of the FOMC and the concomitant increasesin short-term funding costs over the past year, the elimination of theallowance for deferred tax assets, and the addition of $15.5 million in trustpreferred securities at the holding company level.  Significant non-monetary events include theopening of the Silverado Bank division in Roseville, California, the additionof executive compensation plans in the form of Bank Owned Life Insurance (“BOLI”)and the continued growth of personnel over the intervening year.  In addition, the Bank’s defense against theDOT1web allegations diverted management’s attention and added to professionalexpenses over 2005, such litigation expense did not continue beyond the firstquarter of 2006.

**2004 over 2003**

Thestrong improvement in results of operations for the year ended December 31,2004 when compared to the results of the comparable 2003 period, are primarilydue to increases in volumes held of interest earning assets, primarily loans,and interest bearing liabilities, primarily deposits.  Total assets increased approximately $80.7million or 48.6% when comparing December 31, 2004 to 2003, and average totalassets increased about $112 million or 93% over the same period.

TheCompany’s income from operations was approximately $281,000 for the year endedDecember 31, 2004 as compared to a loss of $565,000 for the comparable periodof 2003.  This was a change ofapproximately $846,000 from the previous period.  The income per basic share was $.10 for 2004,as compared to a loss of $0.36 for 2003. The Company’s return on average assets (ROAA) was .12% and the return onaverage equity (ROAE) was 1.22%, as compared to (0.47%) and (5.05%)respectively, for 2003.

Significantevents that occurred during 2004 included several factors having to do withbalance sheet growth and repositioning. The first is related to the newly interpreted FAS 115 which disallowedthe sale of AFS investments without tainting the entire AFS portfolio.  In addition, the purchased SBA loans hadseveral payoffs which negatively impacted interest income.  Stock based employee compensation influencedreported earnings as well, due to limited trading activity and the utilizationof a thirty day average price calculation for stock option expense purposes.

Twoother areas of influence included the purchasing of a California bank charter andthe opening of the Bank’s third branch, and the costs incurred in eachactivity.  The most significant singleevent on the company’s activities for the year 2004 has to be the secondaryoffering and the initial public trading of the Company’s stock on NASDAQ.  Without the approximate $16 million ofadditional capital and the preparatory accounting, audit and legal costs, theCompany would not have been enabled to continue along the path set for it bythe organizers, board and management of the Company.

**RESULTS OF OPERATIONS**

**2006 over 2005**

Aprimary contribution to the Company’s improvement in earnings in 2006 whencompared to 2005 was a $6.2 million increase in net interest income.  This was brought about by average earningassets being approximately 48.8% greater during 2006 over 2005, and the Company’snet interest margin increase of 32 basis points to 3.81% compared to 3.49% forthe year of 2005.  The increase in thenet interest margin was almost solely due to continuing increased volumes asrate and rate/volume changes nearly offset one another.

Anotherfactor contributing to the Company’s earning improvement in earnings during2006 compared with 2005 is an increase of $910,000 or 118% in non-interestincome.  This increase is mostly due tothe substantial increase in unearned income on trading equities which increased$396,000 over 2005 and exchange fee income 

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of$448,000 for 2006 with no corresponding income category for 2005.  A reduction in the provision for loan lossesof $298,000 or 27.9% when comparing 2006 to 2005 is also a factor in the yearlyearnings improvement for the period ending December 31, 2006.  The provision is determined pursuant to aquarterly comprehensive analysis of the allowance for loan losses.  The allowance is described in more detail inthe Allowance for Loan Losses discussion section and (see Appendix 8 & 9)herein.

Severalfactors mitigated the improved earnings discussed above.  These factors include the increase innon-interest expenses due to the continued internal growth of the Company andthe acquisitions made during the year. Non-interest expense for the year ending December 31, 2006 was $13.6million, an increase of $4.8 million or 54.6%. In addition, the Company has reported a provision for income taxes of$1.1 million for the year ended 2006 as compared to a tax benefit of ($710,000)for the year of 2005.

**2005 over 2004**

TheCompany’s net income for the year ended December 31, 2005 was $1.4 million ascompared to $281,000 for the year ended December 31, 2004.  The Company’s basic income per share for thetwelve months ended December 31, 2005 was $.47 as compared to $.11 per sharefor the prior year ended December 31, 2004, while the Company’s return onaverage equity was 5.03% and 1.22% for the same periods, and return on averageassets was 0.48% and 0.12%, respectively for 2005 and 2004.

Theprimary contribution to the Company’s earnings improvement in 2005 whencompared to 2004 was a $3.0 million increase in net interest income.  This was brought about by average earningassets approximately 28% greater than the prior period, and the Company’s netinterest margin increase of 37 basis points to 3.49% for 2005, from 3.12% forthe year ended December 31, 2004.  Theincrease in the net interest margin was due more to continuing increasedvolumes and a redistribution of assets held, rather than any marked increase ininterest earned on investment or loan portfolio assets.  The second most notable area of change in theCompany’s reported results when one compares 2005 to 2004 is the removal of thevaluation reserve in the Company’s deferred tax asset.  The Company’s prior tax-loss carry-forwardshave been substantially decreased by the results of 2005 operations.  However, the lack of historical loan losseshas impaired the Company’s ability to recognize the tax effect of theprovisions for loan losses, and as a result a substantial deferred tax assetremains on the books and records of both the Bank and the Company.

Otherchanges include a $305,000 increase in the Company’s provision for loan losses,for the year ended December 31, 2005, when compared to the same period of2004.  The provision for loan losses was$1.1 million for 2005 and $764,000 for 2004, an increase of 40%.  The provision is determined pursuant to aperiodic comprehensive analysis of the allowance for loan losses.  The allowance is described in more detail inthe Allowance for Loan Losses discussion section and (see Appendix 8 & 9)herein.

Non-interestincome for the year ended December 31, 2005 was $772,000 as compared to$420,000 in 2004 an increase of $352,000 or 84%. A substantial portion of theincrease in 2005 was due to the BOLI increase in cash surrender value.  This favorable increase in non-interestincome was more than off-set by an increase of $2.6 million in non-interestexpenses which negatively affected the Company’s net non-interest margin.

Whilethe Company had a tax loss carry forward on a consolidated basis, the valuationallowance was removed from the Company’s deferred tax assets and net taxbenefits in the amount of ($710,000) were recorded for the year of 2005.

**2004over 2003**

TheCompany’s net income for the year ended December 31, 2004 was $281,000 ascompared to the loss of $565,000 for the year ended December 31, 2003.  The Company’s basic income per share for thetwelve months ended December 31, 2004 was $0.10 as compared to a loss of $0.36per share for the prior year ended December 31, 2003.

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Theprimary contribution to the Company’s earnings improvement in 2004 whencompared to 2003 was a $3.5 million increase in net interest income.  This was brought about by average earningassets approximately 91% greater than the prior period.  The Company’s net interest margin increasedby 21 basis points to 3.12% for 2004, from 2.91% for the year ended December31, 2003.  The slight increase in the netinterest margin was due more to continuing increased volumes and aredistribution of assets held, rather than any marked increase in interestearned on investment or loan portfolio assets. There was a $162,000 increase in the Company’s provisions for loanlosses, for the year ended December 31, 2004, when compared to the same periodof 2003.  The provision for loan losseswas $764,000 for 2004 and $602,000 for 2003, an increase of 27%.  The provision is determined pursuant to aperiodic comprehensive analysis of the allowance for loan losses.  The allowance is described in more detail(see Appendix 8 & 9) herein.

Therewere a number of events that occurred during the year 2004 that had an impacton the financial performance of the company. The first event was the repositioning of the balance sheet inpreparation for the implementation of the Emerging Issues Task Force Issue no.03-1, “*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments,”* (OTTI) as it relates toFASB 115 *Accounting for Certain Investments in Debt andEquity Securities.*  As theCompany’s subsidiary, Nevada Security Bank had been in existence for only three years on that date and had placedexcess funds in an investment portfolio purchased during a low ebb in theinterest rate cycle which we anticipated would be reduced in an orderly fashionthrough the reduction of Available-for-Sale securities to fund loan growth.  By this orderly sale of investment volumesmatched to loan growth volumes, the Bank’s loss on sale of debt securities in arising interest rate environment would have been offset by a much higherreinvestment rate in approximately a concurrent quarterly period.  By this method, the Bank would not haveexcess idle funds, nor would it be unable to meet the usual and customaryliquidity needs of a growing loan portfolio.

AtJune 30, 2004, the reported accumulated comprehensive loss was $1.251million.  Yields on the 10 year Treasurynotes were approximately 4.90% in mid June, and fell to about 4.23% even as theFed raised the federal funds rate by three-quarters of a percentage pointduring that period.  Long term yieldsgenerally mirror the financial market expectations for short-term interestrates, and this outlook allowed the Company to reduce its Available-for-Saleportfolio from about $50 million at June 30, 2004 to approximately $15.5million as of December 31, 2004 at a net cost (loss on sale) of about $111,000.  As a result of these sales and changes inmoney market conditions, the accumulated net comprehensive loss at December 31,2004 was $363,000.  The Companydetermined that, given the uncertainty surrounding the implementation of OTTIrules and the Bank’s need for liquidity to fund a growing loan portfolio, areduction in the AFS portfolio during a period of relatively attractive pricesin the fixed income markets, was warranted.

Anotherevent was the unexpected early payoff of several SBA whole loans and SBA loaninvestment pools held by the Company. These government guaranteed loans were purchased to enhance assetportfolio returns over investment securities, and to provide variable rateyields over a term of likely increases in overall market rates.  However, unanticipated prepayments caused theCompany to accelerate the amortization of over $176,000 in premium during theyear.

Duringthe year, the Company completed the acquisition of CNA Trust Corporation, aCosta Mesa based California financial institution.  The professional costs associated with thistransaction approximated $125,000.  Thisacquisition allowed the Company’s subsidiary, Nevada Security Bank greateraccess to the I-80 corridor between the Sacramento and Reno markets, and overtime, should enhance the Bank’s loan and deposit volumes.  After relocation of this office to Roseville,California during March of 2005, this office, branded as Silverado Bank, adivision of Nevada Security Bank grew quite substantially and met management’sexpectations for business volumes.

Inaddition, another item concerned the stock based employee compensation expensereported in net income for the year ended December 31, 2004.  Due to the lack of an active trading marketin the Company’s stock, the limited number of shares exchanged daily, as wellas substantial price volatility, it was determined that using a thirty (30) dayaverage market closing price would be the most representative of the commonstock’s fair market value.  Accordingly,the Company has recognized the difference between the market price on the dayof the grant and the lower average closing price for the thirty (30) dayspreceding the grant date as compensation 

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whichhas been reflected in the statement of operations.  This amounted to $83,000 for the year endedDecember 31, 2004.

Otheractivities concerned the opening of the Bank’s newest branch in northwestReno.  The Company expensed significantcosts to prepare the opening of the branch which increases Nevada Security Bank’sfootprint in the Reno market.  In addition,during the year the Company reworked the local area network (“LAN”), telephone,and data infrastructure in preparation for new branches, and the relocated loanproduction office.

Oneof the most significant events was the initial and continuing costs associatedwith the Company’s stock becoming publicly traded.  The increased costs in accounting, legal, andauditing have had an impact on the Company’s overhead, and with the requiredimplementation of the Sarbanes-Oxley Act, most notably Section 404, theseexpenses will continue to have a substantive ongoing impact to the Company’scost of operations.

Non-interestincome for the year ended December 31, 2004 was $473,000 lower than the yearended December 31, 2003, primarily due to the change from gains taken during2003, to losses on sales of investment securities during 2004.  This decrease in non-interest income wascoupled with a $2.0 million unfavorable variance in non-interest expenses,which negatively affected the Company’s net non-interest income.  As a portion of such expenses personnel costsincreased $719,000 or 35.5% as the Company added more experienced management toits employee base along with the new Northwest branch, and occupancy expenserose by $434,000 or 48.4% as a result of the increased space for the Company’sheadquarters, new branch office and the increased space for the loan productionoffice when comparing results for the years ended December 31, 2004 to 2003.

AtDecember 31, 2004, the Company had a tax loss carry forward on a consolidatedbasis, and no tax accrual or expense was recorded for the year then ended.

**Net Interest Income and Net Interest Margin**

TheCompany’s net interest margin depends on the yields, volumes, and mix of itsearning assets components as compared to the rates, volume and mix of variousfunding sources.  The Company’s netinterest margin is its net interest income expressed as a percentage of averageearning assets.  The Average Balances andRates Table, (see Appendix 1), reflects the Company’s average balance sheetvolumes of assets, liabilities, and stockholders equity; the amount ofassociated interest income or interest expense; net interest income; theaverage rate or yield for each category of interest earning asset or interestbearing liability; and the net interest margin for the periods noted.

**Rate/VolumeAnalysis**

Netinterest income can be evaluated from the perspective of relative dollars ofchange in each period.  Interest incomeand interest expense, which are the components of net interest income are shownin the following table on the basis of the amount of any increases (ordecreases) attributable to changes in the dollar levels of the Company’sinterest-earning assets and interest-bearing liabilities (“Volume”) and theyields earned and rates paid on such assets and liabilities (“Rate”).  The change in interest income and interestexpense attributable to changes in both volume and rates has been allocatedproportionately to the change due to volume and the change due to rate.

**2006over 2005**

Netinterest income before the provision for loan losses for the year endedDecember 31, 2006 was $16.0 million, as compared to $9.8 million for the sameperiod in 2005.  This represents anincrease of $6.2 million or about 63%. As previously noted, net interest income is the difference between theinterest income and fees earned on loans and investments, and the interestexpense paid on deposits and other borrowings. The amount by which interest income exceeds interest expense depends ontwo factors: the volume and mix of earning assets as compared to that ofinterest portfolios.  The Company’s netinterest margin is the net interest income expressed as a percentage of earningassts.  The margin for 2006, 2005, and2004, is reflected in Appendix 1 

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andreflects the changes in interest rates earned and rates paid on loans,investments, deposits, and borrowed funds held by the Company during theperiods under review.

TheCompany’s net interest margin has been impacted by three over-ridingconditions.  The first is the continuedrising interest rate environment of the last year or so brought about theactions of the Federal Open Market Committee, the second has been the continuedimproving general economic conditions of the local and regional markets, andthe third is the continuing extremely competitive loan and deposit pricing ofthe major banks in the Company’s market. As a result, the Company’s net interest margin was 3.81%, and itsinterest rate spread was 3.19% for the year ended December 31, 2006.

TheCompany’s 4.30% earnings rate on its investment portfolio for the year endedDecember 31, 2006 as compared to 3.37% and 3.09% for the same periods in 2005and 2004, respectively, was an increase of 93 basis points over 2005 or 27.6%.  This earning rate was favorably impacted bythe increasing rate environment coupled with current period purchases, heavyrefinancing in the mortgage backed portfolio, and the rising interest rates onliquid overnight funds sold on a daily basis.

TheCompany uses an effective tax rate of 37% in calculating the tax equivalentyield of its state, county, and municipal investment portfolio.  Approximately $14.6 million of the investmentportfolio is comprised of tax exempt investments which is an increase of $14.3million from the prior year.

TheCompany’s rates earned on its loan portfolio over the same periods increased146 basis points to 8.65% or an increase of about 20%.  The significant increase in loans outstandingand the change in mix contributed to the increase in loan interest income overthe periods under review.  While theprime rate rose five times from 7.0% to 8.25% during 2005, the overall earningsrate of 8.65% for the year ended December 31, 2006 was noticeably improved fromthe 7.19% rate earned for the year ended December 31, 2005.

Asa result of the foregoing, the Company’s gross interest earnings asset rate forthe year ended December 31, 2006 was 7.42%, as compared to 6.10% for the sameperiod of 2005, and 4.79% for 2004.

Interestexpense for 2006 and 2005 was impacted by the escalating short-term interestrate environment previously noted, however, the Company’s interest paid rate onall interest bearing liabilities was 4.22% for the year ended December 31, 2006as compared to 3.23% for the same period in 2005, and 2.06% for 2004. TheCompany’s overall net interest margin increased to 3.81% for the year endedDecember 31, 2005 as compared to 3.49% for the same period in 2004, and 3.12%for 2003.

Althoughactual earning rates increased on the Company’s investments and loan portfoliosover the year ended December 31, 2006 when compared to the same period in 2005,the change in asset mix combined with significant volume increases on totalearning assets resulted in the most impact on interest income.  As a result, the Company’s net interestmargin increased by 32 basis points during the year ended December 31, 2006when compared to the same period of 2005, and 37 basis points over the yearended December 31, 2005 when compared to the same period in 2004.

TheChanges in Net Interest Income Table (see Appendix 2) presents informationregarding interest income and interest expense for each major category ofinterest-earning assets and interest-bearing liabilities.  The table sets forth changes in interestincome and expense attributable to changes in average balances (volume) orchanges in average interest rates (rates). The calculation is as follows: (i) changes in rate (changes in rate multiplied by prior year volume),(ii) change in volume (change in volume multiplied by prior year rate) and(iii) changes in both rate and volume (change in rate multiplied by change involume).  Changes in interest income andexpense that are not due solely to volume or rate changes are combined with therate/volume change category.

Rate/volumechanges are shown to have brought about the decline of $1.2 million in netinterest income for the year ended December 31, 2006 relative to the sameperiod of 2005.  While the rate/volumeeffect is negative, this was almost completely offset by increases in netinterest income due to rate changes. Total interest income on a volume basis substantially overshadowed therate and rate/volume effects and accordingly net interest income rose by $6.1million over the period due to positive variances in loan and investmentportfolio volumes.

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TheCompany’s net interest margin is also impacted by changes in the mix ofinterest earning assets and interest bearing liabilities, as well as by changesin the relative level of non - earning assets (including cash and due frombanks). The relative mix of interest earning assets to interest bearingliabilities remained essentially unchanged in 2006 as compared to 2005.  Changes in the volume mix and rising rateshad a positive impact on the weighted average yield on net interest spread.

Forthe twelve months ended December 31, 2006 the average yield on the investmentportfolio was 4.30%, while the average yield on the loan portfolio was 8.65%for a combined weighted yield of 7.42% on $419 million of average earning assets.

Forthe same period, the interest costs on deposit liabilities was 4.08% and 5.21%on other interest bearing liabilities, for a combined weighted average cost of4.22% on $358 million of total average interest bearing liabilities.

**2005over 2004**

Netinterest income before the provision for loan losses for the year endedDecember 31, 2005 was $9.8 million, as compared to $6.9 million for the sameperiod in 2004.  This represents anincrease of about $3.0 million or about 43%. As previously noted, net interest income is the difference between theinterest income and fees earned on loans and investments, and the interestexpense paid on deposits and other borrowings. The amount by which interest income exceeds interest expense depends ontwo factors: the volume and mix of earning assets as compared to that ofinterest portfolios.  The Company’s netinterest margin is the net interest income expressed as a percentage of earningassts.  The margin for 2005, 2004, and2003, is reflected in Appendix 1 and reflects the changes in interest ratesearned and rates paid on loans, investments, deposits, and borrowed funds heldby the Company during the periods under review.

TheCompany’s net interest margin has been impacted by three over-ridingconditions.  The first is the continuedrising interest rate environment of the last year or so brought about theactions of the Federal Open Market Committee, the second has been the continuedimproving general economic conditions of the local and regional markets, andthe third is the continuing extremely competitive loan and deposit pricing ofthe major banks in the Company’s market. As a result, the Company’s net interest margin was 3.49%, and itsinterest rate spread was 2.87% for the year ended December 31, 2005.

TheCompany’s 3.37% earnings rate on its investment portfolio for the year endedDecember 31, 2005 as compared to 3.09% for the same periods in 2004 and 2003was an increase of 28 basis points or 9.06%. This earning rate was favorably impacted by the increasing rateenvironment coupled with current period purchases, heavy refinancing in themortgage backed portfolio, and the rising interest rates on liquid overnightfunds sold on a daily basis.

TheCompany uses an effective tax rate of 34% in calculating the tax equivalentyield of its state, county, and municipal investment portfolio.  Approximately $14 million of the investmentportfolio is comprised of tax exempt investments which is an increase of $13million from the prior year.

TheCompany’s rates earned on its loan portfolio over the same periods increased105 basis points to 7.19% or an increase of about 17%.  The significant increase in loans outstandingand the change in mix contributed to the increase in loan interest income overthe periods under review.  While theprime rate rose eight times from 5.0% to 7.0% during 2005, the overall earningsrate of 7.19% for the year ended December 31, 2005 was noticeably improved fromthe 6.14% rate earned for the year ended December 31, 2004.

Asa result of the foregoing, the Company’s gross interest earnings asset rate forthe year ended December 31, 2005 was 6.10%, as compared to 4.79% for the sameperiod of 2004, and 4.55% for 2003.

Interestexpense for 2005 was impacted by the rapidly escalating short-term interestrate environment previously noted, however, and the Company’s interest paidrate on all interest bearing liabilities was 3.23% for 

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theyear ended December 31, 2005 as compared to 2.06% for the same period in 2004,and 2.01% for 2003. Although the Company’s overall net interest marginincreased to 3.49% for the year ended December 31, 2005 as compared to 3.12%for the same period in 2004, and 2.91% for 2003, prior to the fourth quarter of2005, the Company’s net interest margin had not been as adversely affected byrising short-term interest rates on the liability side of the balance sheet.

Althoughactual earning rates increased on the Company’s investments and loan portfoliosover the year ended December 31, 2005 when compared to the same period in 2004,the change in asset mix combined with significant volume increases on totalearning assets resulted in the most impact on interest income.  As a result, the Company’s net interestmargin increased by 37 basis points during the year ended December 31, 2005when compared to the same period of 2004, and 21 basis points over the yearended December 31, 2003 when compared to the same period in 2002.

TheChanges in Net Interest Income Table (see Appendix 2) presents informationregarding interest income and interest expense for each major category ofinterest-earning assets and interest-bearing liabilities.  The table sets forth changes in interestincome and expense attributable to changes in average balances (volume) orchanges in average interest rates (rates). The calculation is as follows: (i) changes in rate (changes in rate multiplied by prior year volume),(ii) change in volume (change in volume multiplied by prior year rate) and(iii) changes in both rate and volume (change in rate multiplied by change involume).  Changes in interest income andexpense that are not due solely to volume or rate changes are combined with thevolume/rate change category.

Interestbearing liability rate changes are shown to have brought about the decline of$525,000 in net interest income for the year ended December 31, 2005 relativeto the same period of 2004.  While therate effect is negative, total interest income on a volume basis wassubstantially overshadowed this negative effect and net interest income rose by$3.0 million over the period due to positive variances in loan portfoliovolumes.

TheCompany’s net interest margin is also impacted by changes in the mix ofinterest earning assets and interest bearing liabilities, as well as by changesin the relative level of non - earning assets (including cash and due frombanks).  On the asset side of the balancesheet, the relative increase in the loan volume as compared to investmentsvolume as a portion of average earnings assets, as well as the change in theloan to deposit ratio had a positive impact on the weighted average yield onearning assets.

Forthe twelve months ended December 31, 2005 the average yield on the investmentportfolio was 3.37%, while the average yield on the loan portfolio was 7.19%for a combined weighted yield of 6.10% on $281 million of average earningassets.

Forthe same period, the interest costs on deposit liabilities was 3.17% and 3.87%on other interest bearing liabilities, for a combined weighted average cost of3.23% on $228 million of total average interest bearing liabilities.

**2004over 2003**

Netinterest income before the provision for loan losses for the year endedDecember 31, 2004 was $6.9 million, as compared to $3.4 million for the sameperiod of 2003.  This represents anincrease of about $3.5 million, or about 105%. As previously noted, net interest income is the difference between theinterest income and fees earned on loans and investments, and the interestexpense paid on deposits and other borrowings. The amount by which interest income exceeds interest expense depends ontwo factors: the volume and mix of earning assets as compared to that ofinterest bearing deposits and borrowings, and the interest rates earned versusthe interest rates paid on each of the balance sheet portfolios.  The Company’s net interest margin is the netinterest income expressed as a percentage of earning assets.  The margin for 2004, and 2003, is reflectedin Appendix 1 and reflects the changes in the rates earned and rates paid on loans,investments, deposits, and borrowed funds held by the Company during theperiods under review.

TheCompany’s net interest margin was impacted by three over-ridingconditions.  The first is the pervasivelow interest rate environment of the last few years brought about by theactions of the Federal Open Market 

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Committee,the second has been the slowly improving general economic conditions of thelocal and regional markets, and the third is the extremely competitive loanpricing of the major banks in the Company’s market.  As a result, the Bank’s net interest marginwas 3.12%, and its interest rate spread was 2.73% for the year ended December31, 2004.

TheCompany’s 3.09% earnings rate on its investment portfolio for the year endedDecember 31, 2004 and also 2003, as compared to 3.68% for 2002, was unfavorablyimpacted by the low interest rate environment, heavy refinancing in itsmortgage backed portfolio, and the low rate on liquid overnight funds sold on adaily basis.  The increase in earningsfor the investment portfolio is almost entirely due to changes in volume.

TheCompany’s rates earned on its loan portfolio over the same periods fell by thesame magnitude.  The significant increasein loans outstanding and the change in mix contributed to the reduction in ratesover the periods under review.  While theprime rate rose twice during the intervening period, the overall earnings rateof 6.14% for the year ended December 31, 2004 was not as noticeably reducedfrom the 6.44% rate earned for the year ended December 31, 2003.  As previously noted, premiums of $176,000were amortized into loan income during the year ended December 31, 2004.  This amount represented a reduction of 14basis points in the earnings rate for the period.  The portfolio rate for the year endedDecember 31, 2002 was 7.23%.

Asa result of the foregoing variances, the Company’s gross earnings rate for theyear ended December 31, 2004 was 4.79%, as compared to 4.55% for the sameperiod of 2003, and 4.34% for 2002.

Interestexpense rates for the periods noted above were impacted by the marginallyhigher interest rate environment previously noted, however, and the Company’sinterest rate paid on all interest bearing liabilities was 2.06% for the yearended December 31, 2004 as compared to 2.01% for the same period in 2003, and2.59% for 2002.  The Company’s overallnet interest margin increased to 3.12% for the year ended December 31, 2004, ascompared to 2.91% for the same period in 2003, and 2.65% for 2002.

Althoughactual earnings rates declined on the Company’s investments and loan portfoliosover the year ended December 31, 2004 when compared to the same period in 2003,the change in asset mix resulted in a slight increase on total earningassets.  As a result, the Company’s netinterest margin increased by 21 basis points over the year ended December 31,2004 when compared to the same period of 2003, and 26 basis points over theyear ended December 31, 2003 when compared to the same period in 2002.

TheChanges in Net Interest Income Table (see Appendix 2) presents informationregarding interest income and interest expense for each major category ofinterest-earning assets and interest-bearing liabilities.  The table sets forth changes in interestincome and expense attributable to changes in average balances (volume) orchanges in average interest rates (rates). The calculation is as follows: (i) changes in rate (changes in rate multiplied by prior year volume),(ii) change in volume (change in volume multiplied by prior year rate) and(iii) changes in both rate and volume (change in rate multiplied by change involume).  Changes in interest income andexpense that are not due solely to volume or rate changes are combined with thevolume/rate change category.

Ratechanges are shown to have caused a drop of $23,000 in net interest income forthe year ended December 31, 2004 relative to the same period of 2003.  While the rates are lower, total interestincome on a volume basis was substantially enhanced by approximately $3.5million over the period due to over-riding positive variances in bothinvestment and loan portfolio volumes.

TheCompany’s net interest margin is also impacted by changes in the mix ofinterest earning assets and interest bearing liabilities, as well as by changesin the relative level of non - earning assets (including cash and due frombanks).  On the asset side of the balancesheet, the relative increase in the loan to deposit ratio had a positive impacton the weighted average yield on earning assets.

Forthe twelve months ended December 31, 2004 the average yield on the investmentportfolio was 3.09%, while the average yield on the loan portfolio was 6.14%for a combined weighted yield of 4.79% on $220 million of average earningassets.

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Forthe same period, the interest costs on deposit liabilities was 2.05% and 2.19%on interest bearing liabilities, for a combined weighted average cost of 2.06%on $178 million total average interest bearing liabilities.

**Non–Interest Income and Non–Interest Expense**

**2006 over 2005**

**Non-Interest Income Overview:**

TheCompany’s results reflected a higher level of non-interest income in the yearended December 31, 2006 than that ended December 31, 2005.  Please refer to Non-Interest Income andNon-Interest Expense Table Appendix 3 for additional specific information.  The overall ratio of non-interest income toaverage earning assets increased to 0.40% from 0.27% for the year endedDecember 31, 2006 as compared to 2005, and 0.19% for 2004.  The recent “1031” company acquisitionscontributed $448,000 or 27% of non-interest income which was unavailable inprevious periods.

**Non-InterestExpense Overview:**

Totalnon-interest expenses increased to $13.6 million in the year ended December 31,2006 from $8.8 million in the period ended December 31, 2005, and $6.2 millionfor the year ended December 31, 2004.  Asa percentage of average earning assets, total non-interest expenses were 3.25%and 3.14% for the years ended December 31, 2006 and 2005, respectively, and2.84% for 2004.  The increase ofapproximately 55% for the year 2006 as compared to 2005, and the 42% increasefor 2005 over 2004 reflect the continued substantial additions to staff,offices, and data processing capabilities over time, as the Bank has continuedits expansion in both northern Nevada and northern California over the periodsunder review.  Both geographic centersare anticipated to continue to grow over the foreseeable future, as the Companysolidifies its position in these two growth markets.

TheCompany’s efficiency ratio for all the periods under review declined due to theCompany’s substantial growth, as well as the increase in non-interestincome.  The overhead efficiency ratiorepresents total non-interest expense divided by the sum of net interest incomeand total non-interest income.  Neitherthe provision for loan losses nor realized securities gains or losses isfactored into the equation. The Company’s overhead efficiency ratio was 77.2%for the twelve months ended December 31, 2006 versus 83.4% for the same periodof 2005, and 84.3% for 2004.  Generallyspeaking, a company’s efficiency ratio rises prior to growth spurts asincreases are felt in staffing levels, geographic dispersion of operatingunits, and volumes of business activity. Certainly, that has been the history of our Company.  Further, it is expected that this ratio fallsas such additions are put to full and effective use – this is always ourgoal.  At the current time our ratio(although high) reflects the continuing unabated growth of the Company.

**Non-interest income:**

Includedin the increase in non-interest income is $261,000 in service charges ondeposit accounts for the year ended December 31, 2006 which represented 15.5%of consolidated non-interest income, while the amount for the twelve monthsended December 31, 2005 was $253,000 and 32.8%, respectively and $193,000 and50.0%, respectively, for 2004.  The 2006increase was impacted by a reduction in wire transfer fees of $24,000 comparedto the year ending 2005.  Other servicecharges, commissions and fees are primarily comprised of safe deposit, referralincome and other miscellaneous fees, for all periods under review. These feesdecreased $4,000 to $19,000 for the twelve months ended December 31, 2006versus $23,000 for the same period in 2005, and $20,000 for 2004.

Loandocumentation fees and other loan charges increased to $162,000 for the yearended December 31, 2006 compared to $95,000 and $62,000 for the same periods in2005 and 2004, respectively.

Pre-underwritingfees are a result of agreements with third parties whereby the Company performscertain pre-underwriting activities on SBA loans which are funded by the thirdparty.  These activities are primarilyconducted in the Roseville, California office. This office may contribute some additional loan volumes to the 

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Company,and provide additional sources of income based on sales of governmentguaranteed loans to financial intermediaries. No absolute assurance can be given, however, that this will in fact,occur.  Pre-underwriting fees for theperiods under review decreased to $9,000 from $25,000 for the periods endingDecember 31, 2006 and 2005, respectively, and $154,000 for 2004.

Increasesin the cash surrender value of bank owned life insurance amounted to $307,000for the year ended December 31, 2006, compared to $313,000 for the same periodin 2005. There was no increase in cash surrender value of bank owned lifeinsurance for the year ending 2004.

Exchangefee income is the result of agreements with investors whereby the qualifiedintermediaries perform activities pursuant to the IRS code 1031 which allowsinvestors to defer taxes on the exchange of investment property.  The Company earned $448,000 in exchange feeincome for the year ending December 31, 2006 and such income represented 26.6%of consolidated non-interest income, and no such income was recorded in prioryears.

TheCompany has a small equity portfolio which is held as a trading account.  Unrealized gains and losses are recorded innon-interest income.  The amount of nettrading income was $443,000 for the year ending December 31, 2006, andrepresented 26.3% of consolidated non-interest income as compared to $47,000and 6.1% for the same period in 2005 and $110,000 and 26.2% for 2004.

Thetotal amount of non-interest income for the year ended December 31, 2006 wassomewhat impacted by the transactions taken on sale of securities.  Net gains on the sale of securities amountedto $31,000 for the year ended December 31, 2006 as compared to net gains of$12,000 for the same period in 2005 and net losses of $128,000 for 2004.  In addition the Company had a net gain on thesale of fixed assets of $2,000 for the year ending December 31, 2006 ascompared to $4,000 and $9,000 for the years ending 2005 and 2004, respectively.

**Non-interestexpense**

Thelargest increase for any specific category of expenses was in salaries andemployee benefits, which were $3.4 million or 80.4% higher in the year endedDecember 31, 2006 than for the same period of 2005, and $1.5 million or 53.9%higher in 2005 than 2004.  Personnelcosts approximated 56% of total non-interest expense and 1.8% of averageearning assets during 2006 as compared to 48% and 1.5%, respectively, for 2005,and 44% and 1.3% respectively, for 2004. This reflects the Company’s addition of experienced professional staffduring all three periods as it aligned its staffing levels to business planrequirements.

Thesecond greatest increase in non-interest expenses is in the occupancy costs forthe Company.  Occupancy costs amounted to$1.9 million as of December 31, 2006 as compared with $1.5 million at December31, 2005 and $1.3 million for 2004.  Thiswas due to increased branch locations, and normal cost of living increases inlease costs.  Total occupancy costsincreased approximately $389,000 or 25.4% and represented 14.1% of totalnon-interest expense and 0.46% of average earning assets as of December 31,2006.  This compares with the increase of2005 over 2004 in the amount of $202,000 or 15.2% and costs which represented17.4% of total non-interest expense and 0.54% of average earnings assets as ofDecember 31, 2005.

Thethird greatest increase in non-interest expenses is in the data processingcosts for the Company.  Data processingcosts amounted to $960,000 as of December 31, 2006 as compared with $733,000 atDecember 31, 2005 and $369,000 for 2004. This was due to increased branch locations, upgrades to the Company’s ITinfrastructure and web-sites as well as third party processing systemupgrades.  Total data processing costsincreased approximately $227,000 or 31.0% and represented 7.1% of totalnon-interest expense and 0.23% of average earning assets as of December 31,2006.  This compares with the increase of2005 over 2004 in the amount of $364,000 or 98.6% and costs which represented8.3% of total non-interest expense and 0.26% of average earnings assets as ofDecember 31, 2005.  As a result of theCompany’s orientation towards being an integrated data provider, telephone anddata communication costs have been higher than one might anticipate in a localcommunity institution.  With eightoffices in Nevada, two in California and one in Montana all inter-connected toour data center which provides on-line capabilities, the Company’scommunication costs have not been unexpected. Based on the technology supportedfocus of the Company, it is expected that this higher cost area is likely tocontinue into the future.

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Thefourth largest increase in non-interest expenses was in deposit service costswhich increased $200,000 or 77.3% to $459,000 for the year ending December 31,2006 as compared with $259,000 outstanding for the same period in 2005.  Deposit service costs were 3.4% and 0.11% ofnon-interest expenses and average earning assets, respectively for the yearended December 31, 2006.  The same costswere 2.9% and 0.09% for the year ended in 2005. These increases were largely necessitated by the increase in offices andgrowth of customer accounts in the Company.

InAppendix 3, each of certain other non-interest expense categories are shown withtheir related percentage of overall non-interest expense, so that one may viewtheir contribution to the overall cost structure of the company. Further, theCompany’s efficiency ratio is noted, as was explained above.

Managementexpects that non-interest expense will moderate as a percentage of averageearning assets as the Company continues to grow and management further refinesmost areas of the Company’s cost structure, however, no assurance can be giventhat this, in fact, will occur.

**2005 over 2004**

TheCompany’s results reflected a higher level of non-interest income in the yearended December 31, 2005 than that ended December 31, 2004.  Please refer to Non-Interest Income andNon-Interest Expense Table Appendix 3 for additional specific information.  The overall ratio of non-interest income toaverage earning assets increased to 0.27% from 0.19% for the year endedDecember 31, 2005 as compared to December 31, 2004, and 0.77% for 2003.  The Company’s non-interest income, exclusiveof BOLI and securities items, as a percentage of average earning assets, was0.14% for the year ended December 31, 2005, as compared to 0.20% for 2004 and0.34% for 2003.  The primary differencebetween the reported results has been the previous extent of SBA loanpre-underwriting fees that have declined over the past three years as that areahas had lesser staff available for such endeavors.  The generation of additional service chargesand fee income is an area that is in need of additional managementattention.  It is anticipated that therecent “1031” company acquisitions may help enhance the results previouslyreflected in this area.

Totalnon-interest expenses increased to $8.8 million in the year ended December 31,2005 from $6.2 million in the period ended December 31, 2004, and $4.2 millionfor the year ended December 31, 2003.  Asa percentage of average earning assets, total non-interest expenses were 3.14%and 2.84% for the years ended December 31, 2005 and 2004, respectively, and3.65% for 2003.  The increase of approximately42% for the year 2005 as compared to 2004, and the 48% increase for 2004 over2003 reflect the continued substantial additions to staff, offices, and dataprocessing capabilities over time, as the Bank has continued its expansion inboth northern Nevada and northern California over the periods underreview.  Both geographic centers areanticipated to continue to grow over the foreseeable future, as the Companysolidifies its position in these two growth markets.

TheCompany’s efficiency ratio for all the periods under review declined due to theCompany’s substantial growth.  Theoverhead efficiency ratio represents total non-interest expense divided by thesum of net interest income and total non-interest income.  Neither the provision for loan losses norrealized securities gains or losses is factored into the equation. The Company’soverhead efficiency ratio was 83.4% for the twelve months ended December 31,2005 versus 84.3% for the same period of 2004, and 112.3% for 2003.  Generally speaking, a company’s efficiencyratio rises prior to growth spurts as increases are felt in staffing levels,geographic dispersion of operating units, and volumes of businessactivity.  Our ratio although highreflects the continuing unabated growth of the Company.

Includedin the increase in non-interest income is $206,000 in service charges ondeposit accounts for the year ended December 31, 2005 while the amount for thetwelve months ended December 31, 2004 was 136,000 and $75,000 for 2003.  The 2005 increase was based on the moreconsistent collection of monthly service charges and non-sufficient fundscharges paid on higher deposit account volumes. Other service charges, commissions and fees are primarily comprised ofwire transfer and loan documentation fees, for all periods under review. 

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Thesefees increased $26,000 to $165,000 for the twelve months ended December 31,2005 versus $139,000 for the same period in 2004, and $97,000 for 2003.

Pre-underwritingfees are a result of agreements with third parties whereby the Company performscertain pre-underwriting activities on SBA loans which are funded by the thirdparty.  These activities are primarilyconducted in the Roseville, California office. This office may contribute some additional loan volumes to the Company,and provide additional sources of income based on sales of governmentguaranteed loans to financial intermediaries. No absolute assurance can be given, however, that this will in fact,occur.  Pre-underwriting fees for theperiods under review decreased to $25,000 from $154,000 for the periods endingDecember 31, 2005 and 2004, and $224,000 for 2003, respectively.

Increasesin the cash surrender value of bank owned life insurance amounted to $313,000for the year ended December 31, 2005. There were no such earnings reported for the prior periods under review.

Thetotal amount of non-interest income for the year ended December 31, 2005 wassomewhat impacted by the transactions taken on sale of securities.  Gross losses on the sale of securities amountedto $14,000 which was offset by gains on the sale of trading equities in theamount of $26,000.  In addition theCompany had a net gain on the sale of fixed assets of $4,000.  These activities amount to net gains on salesof $12,000 as compared to losses of $119,000 taken during the preceding yearended December 31, 2004.

TheCompany has a small equity portfolio which is held as a trading account.  Unrealized gains and losses are recorded innon-interest income.  The amount of nettrading income was $47,000 for the period ending December 31, 2005, andrepresented 6.1% of consolidated non-interest income as compared to $110,000and 26.2% for the same period in 2004. The Company did not have a trading account for the year ending 2003.

Thelargest increase for any specific category of expenses was in salaries andemployee benefits, which were $1.5 million or 53.9% higher in the year endedDecember 31, 2005 than for the same period of 2004, and $719,000 higher in 2004than 2003.  Personnel costs approximated48% of total non-interest expense and 1.5% of average earning assets during2005 as compared to 44% of total non interest expenses, and 1.3% of averageearning assets for the same period in 2004, and 48% of total non-interestexpenses and 1.8% of average-earning assets for 2003.  This reflects the Company’s addition ofexperienced professional staff during all three periods as it aligned itsstaffing levels to business plan requirements. In addition to the growth of the Company, approximately $520,000 or 35%of the 2005 increase in salaries and benefits came as a result of premiumexpenses on the bank owned life insurance program.

Thesecond greatest increase in non-interest expenses is in the data processingcosts for the Company.  Data processingcosts amounted to $733,000 as of December 31, 2005 as compared with $369,000 atDecember 31, 2004 and $200,000 for 2003. This was due to increased branch locations, upgrades to the Company’s ITinfrastructure and web-sites as well as third party processing systemupgrades.  Total data processing costsincreased approximately $364,000 or 98.6% and represented 8.3% of totalnon-interest expense and 0.3% of average earning assets as of December 31,2005.  This compares with the increase of2004 over 2003 in the amount of $169,000 or 84.5% and costs which represented5.9% of total non-interest expense and 0.2% of average earnings assets as ofDecember 31, 2004.

Asa result of the Company’s orientation towards being an integrated dataprovider, telephone and data communication costs have been higher than onemight anticipate in a local community institution.  However, with three offices in Nevada and onein California inter-connected out of state locations which provide on-line capabilities,the Company’s communication costs have been high. It is expected that this islikely to continue into the future.

Thethird largest increase in non-interest expenses was in other professionalservices which increased $211,000 or 82.1% to $468,000 for the year endingDecember 31, 2005 as compared with $257,000 outstanding for the same period in2004.  Other professional services were5.3% and 0.2% of non-interest expenses and average earning assets, respectivelyfor the year ended December 31, 2005. The same costs were 4.1% and 0.1% for the year ended in 2004.  These increases were largely necessitated bythe increasing role of external professional 

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staffevaluation of certain risk evaluated areas, as well as by compliance withSarbanes-Oxley, heightened asset liability and risk management practices.

Thefourth largest increase in non-interest expenses was in the occupancy costs forthe Company. This was due to two primary factors; 1) the new California branchadded during the first quarter of 2005, and 2) the additional premises, equipment,and data processing costs initiated by additional lending and administrativepeople in the main office. Total occupancy costs approximated 17% of totalnon-interest expense and 0.54% of average earning assets during the year endedDecember 31, 2005, 21% and 0.60% for 2004, and 21% and 0.78% respectively for2003.

The next largest area of non-interest expense waslegal and accounting costs.  These costsamounted to $515,000 or 5.8% of total non-interest expense and 0.2% of averageearnings assets for the year ended December 31, 2005.  Legal and accounting costs were approximately$519,000 or 8.31% of total non-interest expenses and 0.2% of average earningassets during 2004 and 3.87% of total non-interest expenses, as well as .14% ofaverage earning assets for the same period in 2003.  Reported legal and accounting costs have beenhigh primarily as a result of the Company’s continuing response to a lawsuitpreviously filed, and the additional legal support required in the purchases oftwo “1031” companies, such acquisitions which were completed in the firstquarter of 2006.  Accounting coststhemselves have not significantly changed over the year 2004.

InAppendix 3, each of certain other non-interest expense categories are shownwith their related percentage of overall non-interest expense, so that one mayview their contribution to the overall cost structure of the company. Further,the Company’s efficiency ratio is noted, as was explained above.

**2004 over 2003**

TheCompany’s results reflected a lower level of non-interest income in the yearended December 31, 2004 than that ended December 31, 2003.  See Non-Interest Income and Non-InterestExpense Table Appendix 3.  The overallratio of non-interest income to average earning assets decreased to 0.19% from0.77% for the year ended December 31, 2004 as compared to December 31, 2003,and 0.17% for 2002.

Totalnon-interest expenses increased to $6.2 million in the year ended December 31,2004 from $4.2 million in the period ended December 31, 2003, and $2.8 millionfor the year ended December 31, 2002.  Asa percentage of average earning assets, total overhead expenses were 2.84% and3.65% for the years ended December 31, 2004 and 2003, respectively, and 6.26%for 2002.

TheCompany’s overhead efficiency ratio for all the periods under review declineddue to the Company’s substantial growth. The overhead efficiency ratio represents total non-interest expensedivided by the sum of net interest income and total non-interest income.  Neither the provision for loan losses norrealized securities gains or losses is factored into the equation. The Company’soverhead efficiency ratio was 84.3% for the twelve months ended December 31,2004 versus 112.3% for the same period of 2003, and 223.6% for 2002.

Includedin the decrease in non-interest income is $136,000 in service charges ondeposit accounts for the year ended December 31, 2004 while the amount for thetwelve months ended December 31, 2003 was 75,000 and $24,000 for 2002.  The 2004 increase was based on the moreconsistent collection of monthly service charges and non-sufficient fundscharges paid on higher deposit account volumes. Other service charges, commissions and fees are primarily comprised ofwire transfer and loan documentation fees, for all periods under review. Thesefees increased $42,000 to $139,000 for the twelve months ended December 31,2004 versus $97,000 for the same period in 2003, and $44,000 for 2002.

Pre-underwritingfees are a result of agreements with third parties whereby the Company performscertain pre-underwriting activities on SBA loans which are funded by the thirdparty.  These activities were conductedin the California loan production office. This office contributed additional loan volumes to the Company, andprovided additional sources of income based on sales of government guaranteedloans to financial intermediaries. Pre-underwriting fees for the periods under review decreased to $154,000from $224,000 for the periods ending December 31, 2004 and 2003,respectively.  There were no such feescollected in 2002.  The 

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loanproduction office opened during the last half of 2003 and operations weretemporarily suspended during the second half of 2004 due to changes inpersonnel, the pending office relocation, and pending merger of CNA Trust.

Thetotal amount of non-interest income for the year ended December 31, 2004 wassubstantially impacted by the losses taken on sale of securities.  Gross losses on the sale of securitiesamounted to $157,000 which was partially offset by gains on the sale ofsecurities in the amount of $46,000.  Inaddition the Company had a net gain on the sale of SBA loan investments of$7,000 and realized losses of $15,000 on the equity trading account.  These activities amounted to net losses oninvestments of $119,000 as compared to gains of $497,000 taken during thepreceding year ended December 31, 2003. The securities sold during 2004 were taken when spreads had tightenedand it appeared the bond portfolio valuation would be adversely affected bylikely FOMC activities over 2005 and subsequent periods.

TheCompany has a small equity portfolio which is held as a trading account.  Unrealized gains and losses are recorded innon-interest income.  The amount of nettrading income was $110,000 for the period ending December 31, 2004, andrepresented 26.19% of consolidated non-interest income.  Realized losses on equity sales amounted to$15,000 for the year ended December 31, 2004. The Company did not have a trading account for the years ending 2003 or2002.

Thelargest increase for any specific category of expenses was in salaries andemployee benefits, which were $719,000 or 35.5% higher in the year endedDecember 31, 2004 than for the same period of 2003, and $748,000 higher in 2003than 2002.  Personnel costs approximated44% of total non-interest expense and 1.25% of average earning assets during2004 as compared to 48% of total non interest expenses, and 1.75% of averageearning assets for the same period in 2003, and 45% of total non-interestexpenses and 2.84% of average-earning assets for 2002.  This reflects the Company’s addition ofexperienced professional staff during all three periods as it aligned itsstaffing levels to business plan requirements.

Thesecond greatest increase in non-interest expenses is most evident in theoccupancy costs for the Company. This was due to two primary factors; 1) thenew northwest branch added during the fourth quarter of 2004, and 2) theadditional premises, equipment, and data processing costs initiated by movingThe Bank Holdings into their permanent space. Total occupancy costsapproximated 21% of total non-interest expense and 0.60% of average earningassets during the year ended December 31, 2004, 21% and 0.78% for 2003, and 20%and 1.26% respectively for 2002.

The third greatest area of non-interest expenseincrease has been in legal and accounting costs.  These costs increased $356,000 or 218% forthe year ended December 31, 2004.  Legaland accounting costs approximated 8.31% of total non-interest expenses and .24%of average earning assets during 2004 and 3.87% of total non-interest expenses,as well as .14% of average earning assets for the same period in 2003, and5.73% and 0.36% respectively, for 2002. The primary increases were due to the following factors:  1) the costs associated with the acquisitionand merger of CNA Trust into Nevada Security Bank, and 2) substantiallyincreased expenses associated with public reporting of financial results on amore frequent and regular basis.

Thefourth greatest area of non-interest expense increase has been in dataprocessing costs.  Data processingexpenses increased to 5.91% of total non-interest expenses for the year endedDecember 31, 2004 from 4.75% for the same period of 2003.    This amount was 0.21% of average earningassets for the twelve months ended December 31, 2004, the same as 2003, and3.63% and 0.23% respectively, for 2002. The Company believes that the customerbase envisioned in its business plan is more oriented towards a “high-tech,soft-touch” financial services provider than has previously been the case inthe northern Nevada market. To this extent, the Company started its provisionof banking services to include check truncation, image statements, on-line ATM’sand internet consumer banking, and added commercial account internet bankingupon its move to permanent facilities.

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**Provision for Loan Losses**

Creditrisk is inherent in the business of making loans.  The Company sets aside an allowance forprobable loan losses through periodic charges to earnings, which are reflectedin the income statement as the provision for loan losses.  Specifically, the provision for loan lossesrepresents the amount charged against current period earnings to achieve anallowance for loan losses that in management’s judgment is adequate to absorblosses inherent in the Bank’s loan portfolio. The loan and lease loss provisionis determined by conducting a regular evaluation of the adequacy of the company’sallowance for loan and lease losses, and charging the difference, if any, tothe current month’s expense.  This hasthe effect of creating volatility in the amount of charges to the Company’searnings, based on loan growth, the particular types of loan growth, collateralvalues, debt service coverage, and various other factors.  See Appendices 8 & 9 for informationregarding the activity in The Allowance for Loan Losses.  The provision is determined pursuant to aperiodic comprehensive analysis of the allowance for loan losses, as previouslydescribed.

**2006over 2005 and 2004**

Forthe year ended December 31, 2006 the Company’s provision for probable loanlosses was $771,000, which is $329,000 less than the $1.1 million providedduring the twelve months ended December 31, 2005, and $7,000 more than the$764,000 provided in 2004.  An additional$325,000 provision pre-merger in the acquired Northern Nevada Bank allowancefor loan losses which amounted at merger to $1.9 million was a factor in theCompany’s fourth quarter loan loss calculation. The procedures for monitoringthe adequacy of the allowance, and detailed information on the allowance, areincluded below in “Allowance for Loan Losses”.

Forthe periods under review, December 31, 2006, 2005 and 2004, there were nosubstantive changes in loan concentrations, loan quality, or loan terms, and asa result, the change in the provision for loan losses was primarily related toloan portfolio growth.  See Appendix 6regarding composition of the loan portfolio and Appendix 7 regarding thecontractual maturities of the loan portfolio.

During2006, however, we did refine and further evaluate certain assumptions andestimation methods related to each primary loan category including peer groupand the Company’s loan loss histories. To the current date, there have been no reallocations of the allowancefor loan losses among different parts of the portfolio.

Inaddition, the Bank provides an allowance for undisbursed loan commitments, suchallowance which is reported in other liabilities.  At December 31, 2006, this allowance totaled$334,000 and represented 0.07% of total gross loans.  At December 31, 2005 this allowance was$225,000 and represented 0.09% of total gross loans, as compared to $161,000and 0.10% of the total gross loans reported at December 31, 2004.

**Provision for Income Taxes**

TheCompany and its subsidiaries, with the exceptions of Granite Exchange, Inc. andthe two statutory trusts, file consolidated tax returns.  For financial reporting purposes, the incometax effects of transactions are recognized in the year in which they enter intothe determination of recorded income, regardless of when they are recognizedfor income tax purposes.

Incometax expense is the sum of two components: the current tax expense****or provision and the deferred tax****expense****or provision. Current tax expense is the result of applying the current tax rate totaxable income.

Thedeferred tax provision is intended to account for the fact that income on whichthe Company pays taxes with its returns differs from pre-tax income in theaccompanying Consolidated Statements of Income. Some items of income and expense are recognized in different years forincome tax purposes than in the financial statements.  For example, the Company is only permitted todeduct from Federal taxable income actual net loan charge-offs, irrespective ofthe amount of provision for credit loss (bad credit expense) recognized in itsfinancial statements.  This causes whatis termed a temporary difference**.**  Eventually, as loans are charged-off, theCompany will be able to deduct for tax purposes what has already beenrecognized as an expense in the financial statements.  Another example is the accretion****of discount on certain securities.  Accretion is the 

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recognitionas interest income of the excess of the par value of a security over its costat the time of purchase.  For itsfinancial statements, the Company recognizes income as the discount related tothese securities is accreted.  For itstax return, however, the Company can defer the recognition of that income untilthe value is received at the maturity of the security.  The first example causes a deferred tax assetto be created because the Company has recognized as an expense for its currentfinancial statements an item that it will be able to deduct from its taxableincome in a future year’s tax return. The second example causes a deferred tax liability, because the Companyhas been able to delay until a subsequent year the paying of tax on an item ofcurrent year financial statement income.

Thereare some items of income and expense that create permanent differences.  Examples of permanent differences wouldinclude:

·     tax-exempt income frommunicipal securities that is recognized as interest income for the financialstatements but never included in taxable income; and

·     a portion of meal andentertainment expense that is recognized as an expense for the financialstatements, but never deductible in computing taxable income.

Thesignificant items of income and expense that create permanent differences aredisclosed in the second table of Note 9 as amounts that cause a differencebetween the statutory Federal tax rate of 34% and the effective tax rate.** **The effective taxrate is the amount of the combined current and deferred tax expense divided bythe Company’s income before taxes as reported in the Consolidated Statements ofIncome.

Theamounts of the deferred tax assets and liabilities are calculated bymultiplying the temporary differences by the current tax rate.  The Company measures all of its deferred taxassets and liabilities at the end of each year. The difference between the net asset or liability at the beginning ofthe year and the end of the year is the deferred tax provision for the year.

Mostof the Company’s temporary differences involve recognizing substantially moreexpenses in its financial statements than it has been allowed to deduct fortaxes in the return for the year.  Thisresults in a net deferred tax asset. Deferred tax assets are dependent forrealization on past taxes paid, against which they may be carried back, or onfuture taxable income, against which they may be offset.  If there were a question about the Company’sability to realize the benefit from the asset, then it would have to record avaluation allowance against the asset to reflect the uncertainty.  Given the amount and nature of the Company’sdeferred assets, the past taxes paid, and the likelihood of future taxableincome, realization is assured for the full amount of the net deferred taxasset and no valuation allowance is needed.

Theamounts of the current expense and deferred benefit, the amounts of the variousdeferred tax assets and liabilities, and the tax effect of the principaltemporary differences between taxable income and pre-tax financial statementincome are shown in Note 9.

Includedin the reconciliation table is an item for state taxes.  In addition to the 34% Federal income taxincluded in tax expense, the Company pays a California franchise tax andMontana taxes, as well as Nevada taxes and fees.  These taxes and fees are equivalent to a taxon the Company’s income.  While theCalifornia franchise tax rate is almost 11%, the Company may deduct its statefranchise tax from its Federal taxable income. This reduces the effective tax rate for the state tax by 35%.  Montana financial institutions are subject toa corporation tax, which incorporates or is substantially similar to applicableprovisions of the Internal Revenue Code. The corporation tax is imposed on federal taxable income, subject tocertain adjustments.  State taxes areincurred at the rate of 6.75% in Montana. Nevada imposes no income tax, however,the Bank pays a 2% employment tax on salaries and benefits and pays an annualbranch location fee of $7,000 per location.

At December 31, 2006 the Company has anoperating loss carry-forward for federal income tax purposes of $217,000 ascompared to December 31, 2005 and 2004, respectively, when the Company hadapproximately $1.2 and $2.5 million of operating loss carry-forwards forfederal income tax purposes.  The Companyrecorded $1.1 million of tax provision for the year ending December 31, 2006 ascompared to 2005 when the Company 

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removed its deferred tax asset valuationallowance and accordingly reported a net tax expense credit of $710,000.  Refer to Footnote 9 of the financialstatements for further discussion and analysis of the deferred tax assets.

**Financial Condition**

TheCompany is continuing its growth path, as is evidenced by the increase in totalassets to $651.5 million at December 31, 2006 from $384.6 million at December31, 2005 or total growth of about $266 million since the end of the year 2005,and previous growth of about $138 million between December 31, 2005 andDecember 31, 2004.  Of the $267 milliongrowth in 2006, approximately $150 million was due to the acquisition of NNBHoldings, Inc., and approximately $117 million of the growth was internalorganic growth.  Between December 31,2005 and December 31, 2006, total deposits have increased $159 million orapproximately 47.0%, investment securities (not including the trading account)have increased over $9.1 million, or 10.9% and gross loans have grown by over$218.7 million, an increase of approximately 89.2%.

TheCompany’s primary deposit growth has come from its branches and a specializedprogram of tax free real estate exchange deposits. At December 31, 2006, thesedeposits totaled approximately $70 million and accounted for about 14% of thesubsidiary bank’s deposits as compared with $96 million and 28%, respectivelyfor 2005.  With the addition to staffduring 2006, a more formal program of cross-selling and specific marketingactivities was implemented to further enhance deposit and loan growth.

**BALANCE SHEET ANALYSIS**

**EARNINGASSETS**

**InvestmentPortfolio**

Themajor components of the earning asset base for the Company are its investmentsecurities and loan portfolios. The detailed composition and growthcharacteristics of both of these portfolios are very significant to anyanalysis of the financial condition as well as results of operations of theCompany. The Company’s investments are analyzed in this section, while the loanportfolio is discussed in a later section of this Form 10-K.

SeeAppendix 4 for a detailed schedule for securities available for sale and heldto maturity and Appendix 5 for information regarding the contractual maturitiesof our debt securities.  Actualmaturities will differ from contracted scheduled maturities because borrowersmay have the right to call for redemption or prepay obligations with or withoutcall or prepayment penalties.

Pursuantto SFAS No. 115, “Accounting for Certain Investments in Debt and EquitySecurities” issued on December 31, 1993, the Company classified its investmentsinto three primary portfolios; “available for sale”, “held to maturity”, and “trading”.

Theinvestment portfolio serves several purposes: 1) it provides liquidity tomitigate uneven cash flows from the loan and deposit activities of customers;2) it provides a source of pledged assets for securing public deposits andborrowed funds; 3) it is a large base of assets, the maturity and interest ratecharacteristics of which can be changed more readily than the loan portfolio tobetter match changes in the deposit base and other funding sources of theCompany; 4) it is an alternative interest-earning use of funds when loan demandis light; and 5) it may provide partially tax exempt income. During the Company’sgrowth since its inception five years ago, deposit acquisition activitiesoutpaced loan growth until the latter half of 2004.  As a result, the Company’s investmentportfolio was the primary placement of interest earning funds over the firsttwo and one half years of the Company’s existence.  Since that time, loan volumes have replacedinvestment volumes as the primary interest earning assets base.

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TheCompany’s investment portfolio is primarily composed of six subsets: (1) liquidfunds, which includes “Fed Funds Sold”, temporary overnight sales of excessfunds to correspondent banks, and money market funds with maturities of lessthan 30 days.  These items are notdetailed as an element within the Company’s reported longer-term securitiesportfolio; (2) US Treasury and Agency issues for liquidity; (3) state, countyand municipal obligations which may provide limited tax free income andpledging potential; (4) mortgage-backed securities for cash flow and enhanced earnings;(5) corporate bonds; and (6) other equity investments, some of which arereadily marketable and carried in investments, and some of which are notreadily marketable and are carried in other assets.  These latter items include equity in theFederal Home Loan Bank of San Francisco, Pacific Coast Bankers’ Bancshares anda passive investment in Carson River Community Bank, (“CRCB”), all of which arecurrently considered not to have readily determinable fair market values.  Other non-marketable investments includepurchase fund costs in the Company’s 1031 subsidiaries.  At December 31, 2006, the amount of FHLBstock and Pacific Coast Bankers’ Bancshares (“PCBB”) equity shares was $3.2million and $398,000 respectively, while the CRCB investment is $500,000.  The amount of FHLB stock purchased is relatedto the Company’s extent of funds borrowed from the FHLB as of each reportingperiod.  These restricted investments arecarried at cost and the FHLB stock value is determined by ultimaterecoverability of par value.  The valueof PCBB stock will be ultimately determined by earnings, marketingconsiderations, and the number and health of banks within PCBB’s regionalenvirons.  For discussion purposes, whenwe refer to the securities portfolio, we mean investment portfolio subsets 2-5,which are listed as our available-for-sale securities and our held-to-maturitysecurities on our reports of condition. The relative distribution of these groups within the overall portfolio hasvaried over the periods noted, especially as regards the extent of agency,mortgage-backed and corporate investments held. They may vary in volume based on investment rates paid, perceived valuein a rising or falling interest rate environment, and various other factorshaving to do with current FOMC activities and money market conditions.  The trading portfolio consists of equityinvestments in listed stocks on the national exchanges.  In some instances covered call options werewritten against issues carried in this portfolio.

Totalinvestment securities were approximately $93 million at December 31, 2006,exclusive of temporary overnight placements of about $1.3 million in liquidmoney market funds and $0.5 million in Federal Funds sold.  This compares to slightly less than $84million of investment securities and about $36.3 million in Federal Funds andliquid money market funds at December 31, 2005. The investment portfolio increased approximately $9 million or 11% atDecember 31, 2006 as compared with the same period in 2005.  The majority of the increase was representedby state and political subdivision investments during 2006.

Totalinvestments averaged approximately $118 million for the year ended December 31,2006, a 48% increase from the approximately $80 million average reported atDecember 31, 2005.  The most noticeabledifference in the portfolio was the addition of a greater volume of municipalsecurities as compared to the previous period. The Company has been successful in modifying its balance sheetallocation activities to achieve greater earnings through loans than waspossible in prior periods.  Theinvestment portfolio for the years ended December 31, 2006 and 2005 comprised28% of average earning assets, while for the year ended December 31, 2004, theinvestment portfolio represented an even greater 44% of average earning assets.

Concentrationsof investments or securities held exceeding 10% of stockholders’ equity are asfollows:  the current book value of heldto maturity pass through securities issued by FNMA and FHLMC at December 31,2006 was $21.7 million, with a market value of $21.2 million, while at December31, 2005 this amount was $23.6 million with a market value of $22.9million.  For the date of December 31,2006 the amount of mortgage backed pass through securities guaranteed by GNMAwas $1.9 million with a market value of $1.8 million, while at December 31,2005 this was $2.5 million with a market value of $2.4 million.  Other held to maturity mortgage backed CMO’sissued or guaranteed by FNMA, FHLMC or GNMA at December 31, 2006 were $10.6million with a market value of $10.4 million, while at December 31, 2005 thisamount was $12.5 million with a market value of $12.1 million.

Effectiveduration is a measure of duration which considers changes in cash flows and isbased on the expected price volatility of a security.  Generally the greater the duration of thesecurity or portfolio, the greater will be its percentage pricevolatility.  The effective duration ispresented in years and is equal to the approximate percentage change in priceper 100 basis point change in rate.  Theeffective duration of the Company’s

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 investment portfolio at December 31, 2006 is2.53, as compared with 2.38 and 2.12 as of the same date in 2005 and 2004,respectively.  This slight increase induration during the year was the result of changes in market rates of interestas well as generally longer term to maturity of the municipal securitiesportion of the overall investment portfolio.

**Loan Portfolio**

Themajor component of interest earning assets is the Company’s loanportfolio.  A detailed review of thecomposition and characteristics of this portfolio is important to any analysisof the financial condition and results of operations of the Company.

Acomparative schedule of the distribution of the Company’s loans at December 31,2006, 2005 and 2004 is presented in Appendix 6, Composition of The LoanPortfolio.  The amounts shown in thetable are before deferred or unamortized loan origination, extension, orcommitment fees and origination costs for loans in that particularcategory.  Further, the figures noted foreach category are presented as percentages, for ease of reviewer analysis.  For each period reported, there are no loansbeing serviced by the institution for the benefit of others.  Further, no loans are considered held forsale.

Gross loans have increased by about $219 million, or over 89% to almost$464 million during the twelve months ended December 31, 2006.  As one can see in Appendix 6, the mostsignificant volume change between December 31, 2006 and December 31, 2005 hasbeen the increase of the Company’s real estate secured loan portfolio.  This volume increased by about $185 million,and comprised about 85% of all loan growth during the twelve months endedDecember 31, 2006.  Approximately 55% ofthe growth that has occurred was related to the acquisition of NNB Holdings,and Northern Nevada Bank.  Internalgrowth has been accomplished primarily in the increased activity levels of theCompany’s Roseville, CA office. This growth portends well for thediversification of risk within the Company’s large and growing loanportfolio.  While the types of creditsgranted in this market are not extremely dissimilar from those granted in thenorthern Nevada market, the fact that these areas are separated by a mountainrange and are in different states subject to differing regional economies andgovernmental regulations reflects the added benefit of geographic riskdispersion within the Company’s overall loan portfolio.  Generally speaking, volume changes have beensubstantial in the Company’s loans held in the categories noted, over theperiods under review.

At December 31, 2004, our average interest earning portfolio mix didnot exhibit the characteristics of average assets reported by our peers,however, with 2005 and 2006 loan growth this has changed and the earning assetbase is more in line with our peers. While it is anticipated that loan volumes will continue to increase as apercentage of average earning assets as we grow, there can be no absoluteassurance that this will, in fact, occur. Should the volume of loans change dramatically, a change in the relativemix of loan categories is also likely to occur. As our loan portfolio ages and expands, it is also anticipated that ourhistory of few delinquencies and no charge-offs over the past five years islikely to change as well.  While we areproud of our achievements in this regard, we are ever mindful of how any changein regulations, regional economies, interest rates, or other factors may causea decline in the ultimate collectability of any given credit extension.

**Real Estate Lending**

The Banks’ lending activities consist of the origination of bothconstruction and permanent loans on residential and commercial real estate.  The Bank actively solicits real estate loanapplications from real estate brokers, contractors, existing customers,customer referrals, and walk-ins to their offices.  The Banks’ lending policies generally limitthe maximum loan-to-value ratio on residential mortgage loans to 80% of thelesser of the appraised value or purchase price.  The Bank also provides interim constructionfinancing for single-family dwellings. The Bank also makes lot acquisition loans to borrowers who intend toconstruct their primary residence on the respective lot.  These loans are generally for a term of threeto five years and are secured by the developed lot.

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**Land Acquisition and Development Loans**

Where real estate market conditions warrant, the bank makes landacquisition and development loans on properties intended for residential andcommercial use.  These loans aregenerally made for a term of 18 months to two years and secured by thedeveloped property with a loan to value not to exceed 85% of cost or 80% ofmarket value, whichever is less.  Theloans are made to borrowers with real estate development experience andappropriate financial strength. Generally it is required a certain percentage of the development bepre-sold or that construction has been pre-qualified for a term take out by theCompany.

**Commercial Real Estate Loans**

Loans are made to purchase, construct and finance commercial realestate properties.  These loans aregenerally made to borrowers who own and will occupy the property.  Loans to finance investment or incomeproperties are made, but require additional equity and a higher debt servicecoverage margin commensurate with the specific property and projected income.

**Consumer Lending**

The majority of all consumer loans are secured by real estate,automobiles, or other assets.  The Bankintends to continue lending for such loans because of their short-term nature,generally between three months and five years, with an average term ofapproximately two years.  Moreover,interest rates on consumer loans are generally higher than on other types ofloans.  The Bank also originates secondmortgage and home equity loans, especially to its existing customers ininstances where the first and second mortgage loans are les than 80% of thecurrent appraised value of the property.

**Credit Risk Management**

The Company’s credit risk management includes appropriate creditpolicies, individual loan approval limits and committee approval of larger loanrequests.  Management practices alsoinclude regular internal and external credit examinations, management reviewand quarterly monitoring of loans experiencing deterioration of credit quality.

**Loan Approval Limits**

Nevada Security Bank’s Board of Directors have voted to allow aDirectors Loan Committee (“Committee”) to approve up to 90% of the Bank’s legal lending limit in regard toloans secured by real estate and listed stocks and bonds.  In addition, the Committee is able to approveall other loans up to 50% of the bank’s legal lending limit.  All higher limits must be approved by theBoard of Directors.  Cash secured loansare excluded from these limits.

The Committee has established individual loan limits for senior lendersand a threshold of loan limits for approval by a combination of seniorlenders.  The Committee approves loansabove these thresholds after the recommendation of the Chief Credit Officer.

**Loan Origination and Other Fees**

In addition to interest earned on loans, the Bank receives loanorigination fees for originating loans. Loan fees generally are a percentage ofthe principal amount of the loan and are charged to the borrower, and arenormally deducted from the proceeds of the loan.  Loan origination fees are generally 1.0% to1.5% on real estate loans and .5% to 1.5% on commercial loans.  Consumer loans require a flat fee as well asa minimum interest amount.  The Banksalso receive other fees and charges relating to existing loans, which includecharges and fees collected in connection with loan modifications and tax servicefees.

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**Loan Maturities**

Appendix7, Scheduled Contractual Maturities of the Loan Portfolio presents the maturitydistribution for each major category of our loan portfolio and the sensitivityof such loans to changes in interest rates at December 31, 2006.

**Off – Balance Sheet Arrangements**

Inthe usual course of business, the Company makes commitments to extend credit aslong as there are no violations of any conditions established in theoutstanding contractual arrangement. Commitments to extend credit were $107.5 million at December 31, 2006 ascompared to $71.2 million and $51.5 million at December 31, 2005 and 2004,respectively.  These commitmentsrepresented about 23%, 29% and 32% of outstanding gross loans at each of theperiods noted, respectively.  The Company’sstand-by letters of credit totaled $545,000, $293,000 and $310,000 at December31, 2006, 2005 and 2004, respectively.  This total represented an insignificant portion of total commitmentsoutstanding at December 31, 2006, 2005 and 2004.

Theimportance to and effect on the Company’s revenues, expenses, cash flows,liquidity, capital resources and market risk from the unused portion of thecommitments to provide credit cannot be reasonably predicted because there isno guarantee that the lines of credit will ever be used. For more informationregarding the Company’s off-balance sheet arrangements, please refer to otherborrowings in this discussion, as well as Note 11 to the financial statements.

**Non–Performing Assets**

Wemanage asset quality and control credit risk through the application ofpolicies, practices and procedures designed to promote sound underwriting andloan monitoring, and the diversification of the loan portfolio.  The loan administration function is chargedwith monitoring asset quality and establishing credit policies, practices andprocedures which are consistently enforced. The Company has two loans on non-accrual totaling $549,000 as ofDecember 31, 2006.  Both loans arecollateralized and have partial SBA guarantees which will mitigate any losspotential.  At all prior periods underreview, we had no non-performing assets.

Theevaluation of these factors of risk is performed by independent third partyreview firms that employ credit professionals to determine our adherence topreviously established internal guidelines. These evaluations include many factors, such as loan growth, changes inthe composition of the loan portfolio, delinquencies, general economicconditions that could impact the value of collateral, management’s generalassessment of loan portfolio quality, and other trends and conditions.  Further, such independent external reviewsinclude evaluating the financial strength of the borrowers, the value ofapplicable collateral, any prior loan loss experiences, the growth in the loanportfolio, and other conditions.  Duringthe twelve months ended December 31, 2006, four such evaluations wereconducted, as was an evaluation of the adequacy of our loan loss allowance andthe methodology employed in its adequacy testing.  In addition, bank regulatory authorities, aspart of their periodic examinations of the Bank, review loan quality and theadequacy of the allowance for loan losses.

Non-performingassets are comprised of the following: loans for which the Company is no longer accruing interest; loans 90 daysor more past due and still accruing interest (although loans are generallyplaced on non-accrual when they become 90 days past due); loans restructuredwhere the terms of repayment have been renegotiated resulting in a deferral ofinterest or principal; and other real estate owned (“OREO”).  Management’s classification of a loan asnon-accrual or restructured is an indication that there is reasonable doubt asto the Company’s ability to collect principal or interest on the loan.  At that point, the Company stops accruingincome from the interest on the loan, reverses any uncollected interest thathad been accrued but unpaid, and recognizes interest income only as cashinterest payments are received and as long as the collection of all outstandingprincipal is not in doubt.  These loansmay or may not be collateralized, but in all cases collection efforts arecontinuously pursued.

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**Allowance for Loan Losses**

Theallowance for loan losses (ALL) is established through a provision for loanlosses based on management’s evaluation of known and inherent risks in theCompany’s loan portfolio.  The allowanceis increased by provisions charged against current earnings, and reduced by netcharge-offs.  Specifically identifiableand quantifiable losses are immediately charged off against the allowance;recoveries are generally recorded only when cash payments are receivedsubsequent to the charge off.

Weemploy a systematic methodology for determining the allowance for loan lossesthat includes a monthly review process and quarterly adjustment of theallowance.  Our process includes aperiodic review of individual loans that have been specifically identified asproblem loans or have characteristics that could lead to impairment, as well asa detailed review of other loans (either individually or in pools).  While this methodology utilizes historicaland other objective information, the establishment of the allowance for loanlosses and the classification of loans is also to some extent, based onmanagement’s judgment and experience.

Peerdata for all institutions reported in the Uniform Bank Performance Report forthe State of Nevada reflects an allowance for loan losses of 1.06% of totalloans at December 31, 2006.  Thiscompares to the National Peer Group 3 (all insured commercial banks havingassets less between $300 million and $1 billion) ratio of 1.20% as of the samedate.  For the National Peer Group, loanlosses were reported at .11% of average total outstanding, on an annualizedbasis, for the period ended December 31, 2006, while for the state, it wasreported at .08%, for the period ended December 31, 2005 and .08% for the yearended December 31, 2004.

Asreported in appendix 8 the Company’s allowance for loan losses as a percent ofgross loans was 1.17% as of December 31, 2006 and the Company had no loanlosses.  At December 31, 2005 the Company’sallowance for loan losses as a percent of gross loans was 1.08%.

Ourmethodology incorporates a variety of risk considerations, both quantitativeand qualitative, in establishing an allowance for loan losses that managementbelieves is appropriate at each reporting date. Quantitative factors include national peer and state peer historicalloss experience, our historical loss experience, delinquency and charge-offtrends, collateral values, changes in non-performing loans, and otherfactors.  Other factors include thestrength of the borrower, collateral (if any), the loan-to-value ratio andother specific criteria.

Qualitativefactors include the general economic environment in our markets and keyindustries in the northern Nevada and northern California markets.  The way a particular loan might bestructured, the extent and nature of waivers of existing loan policies, theresults of bank regulatory examination, model imprecision, and the rate ofportfolio growth are additional qualitative factors that are considered.  To date the Company has experienced no loanlosses.

Appendix8 summarizes the activity in the Allowance for Loan Losses for the periodsindicated.

Appendix9 provides information regarding the allocation of the Allowance for LoanLosses.

Managementbelieves that the ALL at December 31, 2006 is sufficient to absorb lossesinherent in the loan portfolio.  Thisamount is based on the best available information and does involve uncertaintyand matters of judgment.  Accordingly,the adequacy of the loan loss reserve cannot be determined with precision andcould be susceptible to significant change in future periods.  In addition, however, we carry an allowancefor undisbursed loan commitments which is reported as an “other liability.”  At December 31, 2006, 2005 and 2004, suchallowance totaled $334,000, $225,000 and $161,000, respectively, andrepresented 0.32%, 0.32% and 0.31% of loan commitments outstanding, respectively,and 0.07%, 0.09% and 0.10% of total gross loans, respectively.

**Non-Earning Assets**

Non-earningassets are those assets that by their characteristics do not generate interestincome for the 

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Company.  Generally speaking, a financial institutionwould prefer to minimize such assets, which are primarily composed of cash anddue from balances, premises and equipment, bank owned life insurance,intangibles and “other” assets.  AtDecember 31, 2006, 2005 and December 31, 2004 such assets totaled about $74million, $19.0 million and $19.0 million, respectively and representedapproximately 11%, 5% and 6% of total assets, respectively. This total iscomprised of $31 million goodwill, $15 million cash and due from banks, $12million bank owned life insurance, $8 million in property and equipment, $3million in accrued interest receivable and $5 million in other assets.

**Cash and Due From Banks**

Cashon hand and balances due from correspondent banks amounted to $31 million as ofDecember 31, 2006 of which nearly $16 million is interest bearing mostlyrelated to activities of the 1031 qualified intermediaries.  The remainder represents a major portion ofthe Company’s non-earning assets.  AtDecember 31, 2006, non-interest bearing cash and due from banks totaled $15million, and comprised about 2% of total assets and about 20% of totalnon-earning assets, as compared to about 2% and 31%, respectively, of totalassets and non-earning assets at December 31, 2005.

**Bank Owned Life Insurance**

AtDecember 31, 2006, the Company has $11.9 million in Bank Owned Life Insurance (“BOLI”)classified as a non-earning asset, as compared to $6.3 million for the sameperiod in 2005. Approximately $3.5 million was acquired in the purchase andmerger of NNB Holdings, and Northern Nevada Bank.  BOLI is an insurance policy with a singlepremium paid at policy commencement.  Itsinitial net cash surrender value is equivalent to the premium paid, and it addsincome through non-taxable increases in its cash surrender value, net of thecost of insurance, plus any death benefits ultimately received by theCompany.  The costs of certain benefitplans added by the Company in 2005 are “funded” with BOLI income, projected tohave a tax-equivalent return of about 5%. No assurance can be given that this return will be fully realized,however.

**Premises and Equipment**

Fixedassets totaled $7.9 million of non-earnings assets at December 31, 2006,representing about 11% of such total at December 31, 2006 as compared to $2.9million or 15% at December 31, 2005.  TheCompany acquired about $4.5 million in land, buildings and fixed assets duringthe acquisition of NNB Holdings, and Northern Nevada Bank.

Thenet book value of the Company’s premises and equipment increased by $5.0million, or 174%, in 2006. The Company’s net premises and equipment were 1.2%of total assets at December 31, 2006, and less than 1% of total assets at theend of 2005.  At December 31, 2006 therewere no material commitments for capital expenditures, nor were there any fixedor long lived assets held for sale or impaired in value.

Premisesand equipment are stated at cost less accumulated depreciation andamortization.  Depreciation is charged toincome over the estimated useful lives of the assets and leasehold improvementsare amortized over the terms of the related lease, or the estimated usefullives of the improvements, whichever is shorter.  Depreciation and amortization wasapproximately $613,000 million for the year ended December 31, 2006 as comparedto $521,000 during 2005.  Appendix 10,Premises and Equipment reflects the balances by major category of fixed assets.

**IntangibleAssets**

Intangibleassets represented the single largest increase in non-earning assets with atotal of $31.0 million as of December 31, 2006 as compared to $500,000 for thesame period in 2005.  Intangible assetsconsist of identified intangible assets like “Core Deposit Intangible”, whichare amortized over their useful lives and a general intangible of goodwillwhich is subject to an annual impairment test. The Company has identifiable intangibles of $1.9 million as of December31, 2006 related to the acquisition of NNB Holdings, and Northern 

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NevadaBank.  The three other primary componentsof this intangible are; the acquisition of NNB for $25 million, GraniteExchange for $5 million and CNA Trust for $500,000.

**Other Assets**

Otherassets are primarily composed of accrued interest receivable on investments andloans, certain prepaid accounts, deferred tax assets, and items in process ofreview and determination as to their ultimate disposition.  These amounts were $7.7 million, $3.3 millionand $1.5 million as of December 31, 2006, 2005 and 2004, respectively.  Of the total “other assets”, accrued interestreceivable represented 42%, 51% and 70% at December 31, 2006, 2005 and 2004,respectively.

Deferredtax assets amounted to approximately $1.7 million and represent nearly 22% ofthe “other assets” category, for the year ended December 31, 2006, as comparedto approximately $763,000 and 23% for 2005. Most of the Company’s temporary differences between book and taxableincome and expenses involve recognizing more expenses in its financialstatements that it has been allowed to deduct for taxes; therefore, the Company’sdeferred tax asserts typically exceed its deferred tax liabilities.  The net deferred tax asset is primarily dueto temporary book/tax differences in the reported allowance for loan lossesplus deferred compensation and securities depreciation, net of deferredliabilities comprised mainly of fixed asset depreciation differences anddeferred loan origination costs. Management has evaluated all deferred tax assets, and has no reason tobelieve that either the quality of the tax deferred tax assets or the Company’sfuture taxable income potential would preclude full realization of all amountsin future years.

**Deposits**

Depositsare the most important source of the Companies’ funds for lending and otherbusiness purposes.  In addition, the Bankderives funds from loan repayments, advances from the FHLB of San Francisco,repurchase agreements, treasury term borrowings, and loan sales.  Loan repayments are a relatively stablesource of funds, while interest bearing deposit inflows and outflows aresignificantly influenced by general interest rate levels and money marketconditions.  Borrowings and advances maybe used on a short-term basis to compensate for reductions in normal sources offunds such as deposit inflows at less than projected levels.  They also may be used on a long-term basis tosupport expanded activities and to match maturities of longer-term assets.  Deposits obtained through the subsidiary Bankhave traditionally been the principal source of funds for use in lending andother business purposes.  Currently, theBank has a number of different deposit programs designed to attract bothshort-term and long-term deposits from the general public by providing a wideselection of accounts and rates.  Theseprograms include regular statement savings, interest-bearing checking, moneymarket deposit accounts, and fixed rate certificates of deposit with maturitiesranging from three months to five years, negotiated-rate jumbo certificates,non-interest demand accounts, 1031 financial intermediary accounts, andindividual retirement accounts.  Depositsare obtained primarily from individual and business residents of the Company’smarket areas.

Animportant balance sheet component impacting the Company’s net interest marginis the composition and cost of the Company’s deposit and other liability base.  Net interest margin is improved to the extentthat growth in deposits can be focused in the less volatile and somewhat moretraditional core deposits, which are non-interest bearing demand, NOW accounts,savings accounts, money market deposit accounts (MMDA’s) and time depositsunder $100,000.

Thecompany’s growth of deposit accounts in the demand, NOW, and Certificate areashas been patterned along traditional means of acquisition:  new customers coming into a branch facility;returning customers well known to staff or management bringing theirrelationships over to the bank, or as the result of calls made by staff,officers, or directors on certain prospective or potential customers.  Further, it is the Company’s goal to haveestablished both deposit and loan relationships with all of the Company’scustomers.

Inaddition to these sources, however, the Company has a deposit acquisitionofficer assigned to real estate related companies, who is responsible fordeveloping growth in this deposit class. As a result of such activities, the Company has generated $70 million ofsavings deposits related to that source of endeavor at December 31, 2006, 

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whichrepresented about 14% of total deposit accounts.  At December 31, 2005 this type of savingsdeposit approximated $96 million and represented about 28% of deposit accounts.

Anadditional source of deposit growth for the Company during 2006 was theacquisition of time certificates of deposits under $100,000 from deposit brokersources.  These bulk deposits issued indenominations of less than $100,000 amounted to $135.5 million, and $42.6million as of December 31, 2006, and 2005, respectively.  The average maturity of these deposits isabout one and a half years.  These fundswere acquired as part of the Company’s asset liability management process andare covering a portfolio of term loans that have a next re-pricing date onaverage of approximately the same period.

Asillustrated in the Average Balances Sheet (see Appendix 1), the average ratepaid on interest bearing deposits increased to 4.08% during the year endedDecember 31, 2006 from 3.17% and 2.05% for the years ended December 31, 2005,and 2004, respectively.  Average interestbearing deposit volumes increased by about $105 million, or approximately 50% forthe year ended December 31, 2006 over the year ended December 31, 2005.

Oneof the primary differences between deposit volumes at December 31, 2006, whencompared to December 31, 2005, is the growth of $102 million in certificates ofdeposit under $100,000.  The majorportion of this growth was in the bulk deposit sourcing discussed above whichcarried market rates of interest slightly higher at inception than depositrates in the local market.  As localdeposit rates have increased over the term, however, such rates are currentlybelow advertised rates for time deposits with similar terms to maturity.

NOWdeposits increased approximately $3.1 million to $10.9 million or 39.7% atDecember 31, 2006 as compared with $7.8 million outstanding as of December 31,2005.  Average NOW accounts represented2.2% of average interest bearing liabilities as of December 31, 2006 ascompared to 3.2% for the same period in 2005. Savings accounts increased $75.3 million to $77.8 million for year endedDecember 31, 2006 versus $2.4 million for the year ended 2005.  The majority of this increase is due tomoving 1031 financial intermediary deposits to savings instead of MMDA accountsduring 2006.  Average savings accountswere 22.3% and 1.1% of average interest bearing liabilities for the years endedDecember 31, 2006 and 2005, respectively.

MMDAaccounts declined $76.8 million to $107.1 million at December 31, 2006 largelydue to changing 1031 financial intermediary deposits to savings accounts versusMMDA accounts.  The transfer of thesedeposits was made to provide the Company with enhanced internal informationflow.  Average MMDA accounts represented31.6% and 56.3% of average interest bearing liabilities as of December 31, 2006and 2005, respectively.

Timecertificates of deposit under $100,000 (including IRA’s), increased $105.4million to $160.3 million or 192%, at December 31, 2006 as compared to $54.9million as of December 31, 2005.  Averagetime certificates of deposits under $100,000 (including IRA’s) amounted to 19.8%of average interest bearing liabilities as of December 31, 2006 as compared to17.1% for the year ended December 31, 2005.

Potentially, the most volatile deposits in a financial institution arethe large certificates of deposits, those generally over $100,000.  Because these deposits, when considered withother customer specific deposits, may exceed the maximum amount of FDICinsurance for an account, depositors may select shorter maturities to offsetperceived risk elements associated with deposits over $100,000.  The Company may find such certificates to bemore volatile than those generated within its branches from traditionalsources; however, as branches generate additional deposit growth, this effectshould be somewhat mitigated.  Refer toAppendix 11, Maturity Schedule of Time Certificates of Deposit for moreinformation.

**Non — Interest Bearing Liabilities**

Non-interestbearing deposit liabilities are an integral part of a financial institution’sfunds portfolio.  These consumer andbusiness checking accounts provide a relatively stable source of investablefunds which are considered among a financial institution’s core deposits.  Non-interest bearing demand deposits totaled 

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$73.7,$49.4 and $33.4 million, respectively, and comprised about 14.8%, 14.6% and17.7%, of total deposits at December 31, 2006, 2005 and 2004 and averaged about12%, 14% and 16% of total average deposits for each of the twelve months endedDecember 31, 2006, 2005 and 2004, respectively.

Othernon-interest bearing liabilities totaled $6.1 million and $2.3 millionrespectively at December 31, 2006 and 2005, and are primarily represented byamounts calculated for interest payable and other expenses accrued but unpaid,minority shareholder interests, and certain clearing amounts.  Accrued interest payable increased $755,000to $1.5 million during the twelve months ended December 31, 2006, due to higherdeposit volumes.  Reserve for taxespayable amounted to $0.8 million as of December 31, 2006 and was insignificantfor 2005.  Accounts payable and accruedexpenses amounted to $2.7 million and $2.3 million for the years ended December31, 2006 and 2005, respectively.

**Other Borrowings and Subordinated Debt**

Wemay occasionally use Fed funds purchased and short-term Federal Home Loan Bank (“FHLB”)borrowings to support liquidity needs created by seasonal deposit flows, totemporarily satisfy funding needs from increased loan demand, and for othershort-term purposes.  Uncommitted linesare available from several correspondent banks, however, the borrowing line atFHLB is dependent on the level of pledged collateral and the extent of FHLBequity held.  There was a total of $56million available from this source at December 31, 2006 and $64 million at December31, 2005, less funds drawn, as noted below. Such funds were made available on an overnight, index based rate at bothDecember 31, 2006 and 2005.

Theselines of credit available to us under various agreements with the Federal HomeLoan Bank of San Francisco, Pacific Coast Bankers’ Bank, and Zions NationalBank are generally available under specified conditions.  The extent of pledged collateral available,the amount of the line and the period over which funds can be drawn may besubject to terms and conditions of an underlying letter of understanding.  At the current time, management is not awareof any known events, demands, trends or uncertainties that would likely resultin the termination or material reduction in availability of our off-balance sheetborrowing arrangements.  Should suchavailabilities be substantially reduced, management would look to otherinternal and external sources of liquidity to support any reduced availabilityfrom current lines, although no absolute assurance can be given that this, infact, would occur.  As of December 31,2005 the Company had no advances outstanding from the FHLB as compared toDecember 31, 2006, when $31.0 million had been drawn.  In addition to overnight advances the Companyacquired $8 million in term advances from the FHLB as a result of the mergerwith NNB Holdings, and Northern Nevada Bank.

Withthe acquisition of the 1031 qualified intermediaries the Company acquired debtof $187,000 to another financial institution which was paid off during thesecond quarter of 2006.  The Company alsoissued two notes payable of $265,000 each, due in one and two years.  These notes are carried at prime and interestis payable at maturity.  One of thesenotes payable was paid during January 2007.

Sincegrowth in core deposits may be at intervals different from loan demand, we mayfollow a pattern of funding irregular growth in assets with overnightborrowings, which are then replaced with core deposits.  This temporary funding is likely to beutilized for generally short—term periods, although no assurance can absolutelybe given that this will, in fact, occur. Refer to Appendix 12, Other Borrowed Funds, which notes the extent ofutilization of various funding sources over represented periods.

Duringthe fourth quarter of 2005 the Company and its Connecticut statutory trustsubsidiary, “The Bank Holdings Statutory Trust I”, (the “Trust”) entered into apurchase agreement pursuant to which it was agreed that the trust would issueapproximately $15.5 million of floating interest rate trust preferred securities(the “Trust Preferred Securities”).  TheTrust Preferred Securities were issued and sold in a private placement exemptfrom registration under the Securities Exchange Act of 1933, as amended.  The Company acquired an 

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additional$5.2 million in Trust Preferred Securities in the purchase of NNB Holdings,Inc.  The Trust Preferred Securitiesissued by the Company require quarterly distributions of interest at a floatingrate equal to the three month LIBOR plus 1.42%. The securities acquired from the purchase currently have a fixed rate of5.95% and will adjust to LIBOR plus 1.85% beginning June 15, 2010.

**EconomicValue of Equity**

Thechanges in net interest income under rising and declining rate scenarios aretypically expected to bear a linear relationship.  The exposure to declining rates isdisproportionate in these simulations, however, because some of the Company’svariable deposit rates are currently close to a perceived floor.  As rates on interest-bearing liabilities hitthis floor the Company’s yields on earning assets continue to fall, creatingsignificant compression in the Company’s net interest margin.  This effect is exacerbated by the fact thatprepayments on fixed-rate loans tend to increase as rates decline.

Theeconomic (or “fair”) value of financial instruments on the Company’s balancesheet will also vary under the interest rate scenarios previouslydiscussed.  Economic values for financialinstruments are estimated by discounting projected cash flows (principal andinterest) at current replacement rates for each account type, while the fairvalue of non-financial accounts is assumed to equal book value and does notvary with interest rate fluctuations.  Aneconomic value simulation is a static measure for balance sheet accounts at agiven point in time, but this measurement can change substantially over time asthe characteristics of the Company’s balance sheet evolve and as interest rateand yield curve assumptions are updated.

Theamount of change in economic value under different interest rate scenarios isdependent upon the characteristics of each class of financial instrument,including the stated interest rate or spread relative to current market ratesor spreads, the likelihood of prepayment, whether the rate is fixed orfloating, and the maturity date of the instrument.  As a general rule, fixed-rate financialliabilities gain in value as interest rates rise and lose value as interestrates decline, while fixed-rate financial assets become more valuable indeclining rate scenarios and less valuable in rising rate scenarios.  The longer the maturity of the financialinstrument, the greater the impact a given rate change will have on itsvalue.  In our economic valuesimulations, estimate prepayments are factored in for financial instrumentswith stated maturity dates, and decay rates for non-maturity deposits are alsoprojected based on management’s best estimates. We have found that model results are highly sensitive to changes in theassumed decay rate for non-maturity deposits, in particular.

Theeconomic value of equity (EVE) is calculated by subtracting the estimated fairvalue of liabilities from the estimated fair value assets.

**Capital Resources**

AtDecember 31, 2006, the Company had total shareholders’ equity of $73.6 million,comprised of $73.4 million in common stock and surplus, $0.9 million inretained earnings, and $709,000 in accumulated other comprehensive loss.  Total shareholders’ equity at the end of 2005was $28.7 million.  The Company’s whollyowned subsidiary, Nevada Security Bank, was required by the FDIC to maintain an8% capital ratio during its first three years of operation.  Due to the Bank’s substantial growth, theCompany has contributed additional capital to the Bank to assure that themandated ratio was not breached during 2006. The Company issued 323,738 shares of its common stock from the exerciseof warrants which were issued in the stock offering of March 2004.  The exercise period for the warrants endedJune 30, 2006.  The Company received $3.4million in proceeds from the exercise of the warrants.  During the third quarter of 2006 the Companyissued 678,740 shares in a private placement and received proceeds of $11.5million.  The proceeds of the privateplacement were used in the acquisition of NNB Holdings, and Northern NevadaBank and for other general corporate purposes. In addition to $7.5 million in cash the Company issued 1,426,208 sharesof common stock to acquire NNB Holdings, and Northern Nevada Bank.

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**Regulatory Capital Guidelines**

Federalbank regulatory agencies use capital adequacy guidelines in the examination andregulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to makecapital requirements more sensitive to differences in risk profiles among banksand bank holding companies.

**Tier I and Tier II Capital**

Underthe guidelines, an institution’s capital is divided into two broad categories,Tier I capital and Tier II capital.  TierI capital generally consists of common shareholders’ equity, surplus andundivided profits.  Tier II capitalgenerally consists of the allowance for loan losses, hybrid capitalinstruments, and subordinated debt.  Thesum of Tier I capital and Tier II capital represents an institution’s totalcapital.  The guidelines require that atleast 50% of an institution’s total capital consist of Tier I capital.

**Risk-based Capital Ratios**

Theadequacy of an institution’s capital is gauged primarily with reference to theinstitution’s risk-weighted assets.  Theguidelines assign risk weightings to an institution’s assets in an effort toquantify the relative risk of each asset and to determine the minimum capitalrequired to support that risk.  Aninstitution’s risk-weighted assets are then compared with its Tier I capital andtotal capital to arrive at a Tier I risk-based ratio and a total risk-basedratio, respectively.  The guidelinesprovide that an institution must have a minimum Tier I risk-based ratio of 4%and a minimum total risk-based ratio of 8%.

**Leverage Ratio**

Theguidelines also employ a leverage ratio, which is Tier I capital as apercentage of total assets, less intangibles. The principal objective of the leverage ratio is to constrain themaximum degree to which a bank holding company may leverage its equity capitalbase.  The minimum leverage rate is 3%;however, for all but the most highly rated bank hold companies and for bankholding companies seeking to expand, regulators expect and additional cushionof at least 1% to 2%.

**Prompt Corrective Action**

Underthe guidelines, an institution is assigned to one of five capital categoriesdepending on its total risk-based capital ratio, Tier I risk-based capitalratio, and leverage ratio, together with certain subjective factors.  The categories range from “well capitalized”to “critically under capitalized.” Institutions that are “under capitalized” or lower are subject tocertain mandatory supervisory corrective actions.

TheCompany uses a variety of measures to evaluate its capital adequacy, withrisk-based capital ratios calculated separately for the Company and theBank.  Management reviews these capitalmeasurements on a quarterly basis and takes appropriate action to ensure thatthey are within established internal and external guidelines.  The Company’s current capital positionexceeds minimum thresholds established by industry regulators.  Based on current regulatory definitions, theBank is well capitalized, which is the highest rating of the categories definedunder Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991.

TheFederal Deposit Insurance Corporation (“FDIC”) has promulgated risk-basedcapital guidelines for all state non-member banks such as Nevada SecurityBank.  These guidelines establish arisk-adjusted ratio relating capital to different categories of assets and offbalance sheet exposures.  There are twocategories of capital under the guidelines, Tier 1 Capital includes commonstockholders’ equity and qualifying minority interests in consolidatedsubsidiaries, less goodwill and certain other deductions, notably theunrealized net gains or losses (after tax adjustments) on available for saleinvestment securities carried at fair market value.  Tier 2 Capital includes preferred stock, certaintypes of debt equity, and the allowance for loan losses, subject to certainlimitations.  At December 31, 2006, 2005and 2004, the Company’s total risk based assets were $516.1 million, $279.3million and $167.0 million, respectively. At December 31, 2006 Nevada Security Bank’s total risk based assets were$494.3 million.  This roughly indicatesthe intensity of capital usage when compared to total reported assets as notedelsewhere in the body of this report.

Appendix 15 sets forth the Company’s and the Bank’s regulatory capitalratios as of the dates indicated.

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**Impact of Inflation**

A financial institution’s asset and liability structure issubstantially different from that of an industrial firm in that primarily allassets and liabilities of a bank are monetary in nature, with relatively littleinvestment in fixed assets or inventories. Inflation can have an important impact on the growth of total assets andthe resulting need to increase equity capital at higher than normal rates inorder to maintain an appropriate equity to asset ratio.  Inflation has been minimal for the pastseveral years and as such has had little or no impact on the financialcondition and results of operations of the Company during the periods discussedherein.

**Liquidity and Market Risk Management**

TheCompany must address on a daily basis the various and sundry factors whichimpact its continuing operations.  Threeof these factors have been previously discussed:  The economic climate which encompasses ourbusiness environment, the regulatory framework that governs our practices andprocedures, and credit risk.  Thissection will address liquidity risk and market risk, two additional risksspecific to the operation of a financial institution that also require activemanagement.

**Liquidity**

Theliquidity of the Company is comprised of three primary classifications:  Cash flows from or used in operatingactivities, cash flows used in investing activities, and cash flows provided byfinancing activities.  Net cash providedby or used in operating activities consists primarily of net income or lossadjusted for certain non-cash income and expense items such as the loan lossprovision, investment and other amortizations and depreciation. For the twelvemonths ended December 31, 2006 net cash provided by operating activities wasabout $11.5 million, compared to $2.8 million for the same period of 2005. Theimprovement for the twelve months ended December 31, 2006 over the same periodof 2005 was primarily as a result of the continued growth of the Bank, and theincrease in net income in 2006 over the same period in 2005.

Netcash used in investing activities, consists primarily the of purchases ofsecurities, and funding of loans, was approximately $99 million and $101million for the twelve months ended December 31, 2006 and 2005, respectively,all of which reflected the continued asset growth of the Bank.

Netcash provided by financing activities for all periods under reviewoverwhelmingly reflects the deposit growth of the organization.  For the twelve months ending December 31,2006 the net cash provided by financing activities was $78 million, as comparedto $135 million for the same period of 2005.

Liquidityrefers to our ability to maintain a cash flow that is adequate to fundoperations and meet obligations and other commitments in a timely andcost-effective fashion.  We requiresources of funds to meet short-term cash needs that may result from loan growthor deposit outflows, or other asset purchases or liability repayments.  These funds are traditionally made availableby drawing down from our correspondent bank deposit accounts, reducing thevolume of fed funds sold, or liquid money market funds,  selling securities, liquidating other assets,or borrowing funds from other institutions.

Theextent to which these funds are available to meet our cash needs determines ourliquidity.  In addition, should the needarise for immediate cash, we could sell either permanently or under agreementto repurchase, those investments in our portfolio which are not pledged ascollateral to support various borrowings or the collateralization of publicdeposits.

Asof December 31, 2006, non-pledged securities comprised about $28.9 million or31% of our securities portfolio.  Otherforms of balance sheet liquidity on that date include vault cash and balancesdue from banks which totaled $31 million. In addition to the liquidity inherent in its balance sheet, we haveoff-balance-sheet liquidity in the form of lines of credit from twocorrespondent banks.  Availability onthese lines totaled approximately $11.5 million at December 31, 2006.  We manage our liquidity in such a fashion asto be able to

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meetany unexpected sudden change in levels of assets or liabilities.  At December 31, 2005 all non-pledgedinvestments were approximately 13% of our total investment portfolio, and totallines of credit approximated $72 million, which were unused as of year end.

Ona long term basis, the Bank’s liquidity may be met by changing the relativedistribution of its asset portfolios, i.e., reducing investment or loanvolumes, or selling or encumbering assets. Further, it may increase liquidity by soliciting higher levels ofdeposit accounts through promotional activities, the use of deposit brokers, orborrowing from correspondents through drawing on its lines of credit.  At the current time, the long-term liquidityneeds of the Bank primarily relate to funds required to support loancommitments, lease obligations, certificate of deposit maturities and debtrepayment.  All of these needs cancurrently be met by cash flows from investment payments and maturities, andinvestment sales if needs be.

TheBank Holdings is a company separate and apart from Nevada Security Bank.  It must provide for its own liquidity.  The private placement which closed August 6,2006 provided equity with which it may continue its current growth, support thecontinued growth of Nevada Security Bank, and the 1031 qualifiedintermediaries, and pay for its obligations incurred during the normal courseof business.

**ITEM 7A.               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

**Interest Rate Risk Management**

Marketrisk arises from changes in interest rates, exchange rates, commodity pricesand equity prices.  The Bank’s marketrisk exposure is primarily that of interest rate risk, and it has establishedpolicies and procedures to monitor and limit earnings and balance sheetexposure to changes in interest rates. The Bank does not engage in trading of financial instruments, nor doesthe Bank have any exposure to exchange rates.

Theprincipal objective of interest rate risk management (often referred to as “asset/liabilitymanagement”) is to manage the financial components of the Company in a mannerthat will optimize the risk/reward equation for earnings and capital inrelation to changing interest rates.  Toidentify areas of potential exposure to rate changes, the Bank uses modelingsoftware to perform an earnings simulation analysis and a market value ofportfolio equity calculation on a quarterly basis.  This identifies more dynamic interest raterisk exposures than those apparent in standard re-pricing gap analyses.

BancWaremodeling software is used for asset/liability management in order to simulatethe effects of potential interest rate changes on the Company’s primarysubsidiary, Nevada Security Bank and its net interest margin.  These simulations can also provide bothstatic and dynamic information on the projected fair market values of the Bank’sfinancial instruments under different interest rate scenarios.  The simulation program utilizes Bank specificloan, deposit and investment data, and incorporates assumptions on there-pricing characteristics of embedded options to determine the effects of agiven interest rate change on the subsidiary bank’s interest income andinterest expense.  Rate scenariosconsisting of key rate and yield curve projections are run against the Bank’sinvestment, loan, deposit and borrowed funds portfolios.  These rate projections can be shocked (animmediate and sustained change in rates, up or down), ramped (an incrementalincrease or decrease in rates over a specified time period), economic (based oncurrent trends and econometric models) or stable (unchanged from current actuallevels).  The Bank typically uses sevenstandard interest rate scenarios in conducting its simulations, four of whichare provided in Appendix 13.

The Bank’s policy is to target the change in the Bank’s net interestincome for the next 12 months to plus or minus 7% based on a 100 basis point(b.p.) shock, plus or minus 14% based on a 200 b.p. shock, and plus or minus21% based on a 300 b.p. shock in interest rates.

SeeAppendix 13 for information on the Bank’s estimated net interest income profileas of December 31, 2006.  The tableillustrates that if there were an immediate downward adjustment of 100 basispoints in interest rates and the Bank did nothing further with regard to the activemanagement of its assets or liabilities, net interest income would likelydecrease by around $955,000, or approximately 7.42%, over the next twelvemonths.  By 

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thesame token, if there were an immediate increase of 100 basis points in interestrates, the Bank’s net interest income would increase by $728,000 or 5.65% overthe next year.  The exposure to decliningrates appears disproportionate in these simulations, however, because most ofthe Bank’s deposit rates have escalated over the past year as a result of FOMCactions.  In reality, management does notexpect current rates to fall significantly. In addition, the preceding interest rate simulation model does not representa financial forecast and should not be relied upon as being indicative offuture results.

Onelesser utilized method of reviewing an institution’s likely changes in netinterest income is to analyze its “gap” position.  That is, to look at the dollar volume ofassets and liabilities whose interest rates earned and paid, will be repricingin various base periods.  This repricinginformation is also used in the liquidity management.  These repricing characteristics are the timeframes within which the interest bearing assets and liabilities are currentlysubject to change in interest rates, either at replacement, repricing ormaturity during the life of the instruments. Interest rate sensitivity management focuses on the repricingcharacteristics and the maturity structure of assets and liabilities duringperiods of changes in market interest rates. Effective interest rate sensitivity management seeks to examine how andwhen assets and liabilities respond to changes in interest rates, and quantifythe impact of interest rate changes on net interest income.  Interest rate sensitivity is measured as thedifference between the volumes of assets and liabilities in our currentportfolios that are subject to repricing at various time horizons: immediate;within three months; over three to twelve months; one to five years; over fiveyears, and on a cumulative basis.  Thedifferences are known as interest rate sensitivity gaps.

Asshown in Appendix 14 Interest Rate Sensitivity Gap, during the first threemonths of 2007, approximately 66% of interest bearing liabilities couldreprice, compared with 50% of all interest earning assets.  This would be characterized as a negativegap, that is, more liabilities reprice in this period than assets.  A positive gap implies that more assets thanliabilities reprice in a given time frame, and the intuitive reaction would bethat in a falling rate environment, it would be more beneficial to benegatively gapped; that is, interest bearing liabilities drop in price fasterthan interest earning assets, and in a rising interest rate environment itwould be better to have interest earning assets reprice quicker than interestbearing liabilities, thereby creating additional short-term income.

Ashort term positive net interest income effect would occur in either instance,based on the positive gap in a falling rate environment, or a negative gap in arising interest rate environment, at least until all interest bearingliabilities or assets are repriced in respect to their maturities, and theenhanced net interest margin is reduced. However, loan and deposit portfolio repricing periods do not bringautomatic short-term increases or decreases in the net interest margin, becauserates may not be adjusted concurrently with market condition changes, and maybe “sticky” in either direction.

Furtherchanges in the mix of earning assets or interest bearing liabilities can eitherincrease or decrease the net interest margin without affecting interest ratesensitivity.  In addition, the interestrate spread between an asset and its supporting liability can vary significantlywhile the timing of repricing for both the asset and the liability remains thesame, thereby impacting net interest income. This characteristic is referred to as basis risk and in general relatesto the possibility that the repricing characteristics of short-term assets tiedto various indices are different from those of funding sources.  Varying interest rate environments can createunexpected changes in prepayment volumes of assets, and pre-maturity demandsfor liabilities that are not reflected in the interest rate sensitivityanalysis.  These customer originatedprepayments or pre-maturities may have a significant impact on our net interestmargin.  Because of these factors, aninterest rate sensitivity gap analysis may not provide an accurate assessmentof our exposure to changes in interest rates and we use modeling software tomore accurately reflect interest rate risk.

Theeconomic (or “fair”) value of financial instruments on the Company’s balancesheet will also vary under the interest rate scenarios previouslydiscussed.  Economic values for financialinstruments are estimated by discounting projected cash flows (principal andinterest) at current replacement rates for each account type, while the fair valueof non-financial accounts is assumed to equal book value and does not vary withinterest rate fluctuations.  An economicvalue simulation is a static measure for balance sheet accounts at a givenpoint in time, but this measurement can change substantially over time as thecharacteristics of the Company’s 

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balancesheet evolve and as interest rate and yield curve assumptions are updated.  At the current time, the Company determinesthe economic value of equity (“EVE”) on a quarterly basis, and is establishingguidelines for such variances based on historical economic and Company trends,after an evaluative period with includes the substantial increases in FOMCrates changes over the past year.  Suchguidelines will be further refined, formalized and documented during the year2007.

**Federal Taxation**

TheCompany files a consolidated federal tax return for all entities except GraniteExchange, using the accrual method of accounting.  All required tax returns have been filed.Financial institutions are subject to the provisions of the Internal RevenueCode of 1986, as amended in the same general manner as other corporations.  See Note 9 to the Consolidated FinancialStatements for additional information.

**State Taxation**

UnderNevada law, financial institutions are subject to employment and branch locationtaxes but not income taxes.  Theemployment tax is calculated 2.0% of total salaries and wages, while the branchlocation fee is $7,000 per branch location, per year.  Montana and California impose state incometaxes.  In these states the Company filesa tax return, based on allocated income that is calculated pursuant to incomeallocation criteria. These criteria are:

·     Property Factor.  Real and personal property, rent or leaseexpense and loan and credit card receivables sourced on the location;

·     Revenue Factor.  Interest, fees and penalties secured by realproperty sourced to the state where the property is located; and

·     Payroll Factor.  Payroll consists of salaries, wages and othercompensation by state tied to Federal 940 reports or state unemploymentreports.

**ITEM 8.     CONSOLIDATEDFINANCIAL STATEMENTS**

Thefollowing financial statements and independent auditors’ reports listed beloware included herein:
| I a.   | Report  of Independent Registered Public Accounting Firms                    |                                          |
|--------|------------------------------------------------------------------------------|-----------------------------------------------|
|   |                                                                         |                                          |
| II.    | Consolidated  Balance Sheets – December 31, 2006, and 2005              |                                          |
|   |                                                                         |                                          |
| III.   | Consolidated  Statements of Operations – Years Ended December 31, 2006, |                                          |
|   |  2005 and 2004                                                          |                                          |
|   |                                                                         |                                          |
| IV.    | Consolidated  Statements of Stockholders’ Equity –                 |                                          |
|   |                                                                         | Years  Ended December 31, 2006, 2005 and 2004 |   |
|   |                                                                         |                                          |   |
| V.     | Consolidated  Statements of Cash Flows – Years Ended                    |                                          |
|   | December  31, 2006, 2005, and 2004                                           |                                          |
|   |                                                                         |                                          |
| VI.    | Notes to the  Consolidated Statements                                        |                                          |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholders andDirectorsThe Bank Holdings

We have audited theaccompanying consolidated balance sheets of The Bank Holdings and subsidiaries(the “Company”) as of December 31. 2006 and 2005 and the relatedconsolidated statements of operations, stockholders’ equity and cash flows forthe two years ended December 31, 2006. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all material respects,the financial position of The Bank Holdings and subsidiaries as of December 31,2006 and 2005 and the results of their operations and their cash flows for thetwo years ended December 31, 2006 in conformity with accounting principlesgenerally accepted in the United States of America.

As discussed in Notes 1and 14 to the financial statements, effective January 1, 2006, the Companychanged its method of accounting for share-based compensation arrangements toconform to Statement of Financial Accounting Standards No. 123R, *Share Based Payments.*

We have also audited theadjustments described in Note 1, Income per Common Share and Note 20,Subsequent Event, that were applied to restate the 2004 financial statementsresulting from the stock dividend in February 2007.  In our opinion, such adjustments areappropriate and have been properly applied.

/s/ Moss Adams LLP

Stockton, CaliforniaApril 2, 2007

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**Report of Independent Registered Public Accounting Firm**

 

To the Board of Directors

The Bank Holdings

Reno,Nevada

Wehave audited, before the effects of the adjustments to earnings per share describedin Note 20, the consolidated statements of income, changes in shareholders’equity, and cash flows for the year ended December 31, 2004 (the 2004 financialstatements before the effects of the adjustments discussed in Note 20 are notpresented herein).  The 2004 financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.

Weconducted our audit in accordance with auditing the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

Inour opinion, the 2004 financial statements, before the effects of theadjustments described in Note 20, present fairly, in all material respects theresults of operations and cash flows of The Bank Holdings and Subsidiary forthe year ended December 31, 2004, in conformity with U.S. generally acceptedaccounting principles.

Wewere not engaged to audit, review, or apply any procedures to the adjustmentsdescribed in Note 20 and, accordingly, we do not express an opinion or anyother form of assurance about whether such adjustments are appropriate and havebeen properly applied.  Those adjustmentswere audited by Moss Adams, LLP.
|                   | /s/ McGLADREY & PULLEN, LLP |   |
|-------------------|---------------------------------|--------|
|              |
|              |
| Las Vegas, Nevada |
| March 16, 2005    |

 

 

McGladrey & Pullen, LLPis an independent member firm of RSM International, an affiliation ofindependent accounting and consulting firms.

 

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**THE BANK HOLDINGS AND SUBSIDIARIESConsolidated Balance Sheets(Dollars in thousands, except per share date)**
| ** **                                                                                                                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| Cash and due  from banks                                                                                                                           |       | $                     | 31,851     |   | $ | 5,980 |   |
| Liquid money  market funds and other short term investments                                                                                        |       | 1,337                 |       | 8,500 |   |
| Federal funds  sold                                                                                                                                |       | 535                   |       | 27,791 |   |
| Cash and cash  equivalents                                                                                                                         |       | 33,723                |       | 42,271 |   |
| Securities,  available for sale                                                                                                                    |       | 16,337                |       | 19,512 |   |
| Securities, held  to maturity (fair value of 2006: $75,718; 2005: $63,048)                                                                         |       | 76,590                |       | 64,309 |   |
| Securities,  trading                                                                                                                               |       | 4,299                 |       | 1,283 |   |
| Other equity  securities, at cost                                                                                                                  |       | 4,750                 |       | 2,067 |   |
|                                                                                                                                               |       |                  |       |   |   |
| Loans, gross                                                                                                                                       |       | 463,858               |       | 245,185 |   |
| Allowance for  loan losses                                                                                                                         |       | (5,430                | )          | (2,655 | ) |
| Deferred loan  fees, net                                                                                                                           |       | (997                  | )          | (356 | ) |
| Loans, net                                                                                                                                         |       | 457,431               |       | 242,174 |   |
|                                                                                                                                               |       |                  |       |   |   |
| Premises and  equipment, net                                                                                                                       |       | 7,857                 |       | 2,863 |   |
| Bank owned life  insurance                                                                                                                         |       | 11,868                |       | 6,312 |   |
| Intangible asset                                                                                                                                   |       | 2,373                 |       | 500 |   |
| Goodwill                                                                                                                                           |       | 28,344                |       | — |   |
| Other assets                                                                                                                                       |       | 7,968                 |       | 3,341 |   |
| **TOTAL ASSETS**                                                                                                                                   |       | $                     | 651,540    |   | $ | 384,632 |   |
|                                                                                                                                               |       |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Deposits:                                                                                                                                          |       |                  |       |   |   |
| Noninterest  bearing demand                                                                                                                        |       | $                     | 73,748     |   | $ | 49,411 |   |
| Interest bearing  demand                                                                                                                           |       | 10,921                |       | 7,825 |   |
| Savings                                                                                                                                            |       | 77,767                |       | 2,382 |   |
| Money Market                                                                                                                                       |       | 107,107               |       | 183,917 |   |
| IRA’s                                                                                                                                         |       | 4,398                 |       | 1,164 |   |
| Time deposits  < $100,000                                                                                                                       |       | 155,903               |       | 53,730 |   |
| Time deposits  > $100,000                                                                                                                       |       | 67,153                |       | 39,769 |   |
| Total deposits                                                                                                                                     |       | 496,997               |       | 338,198 |   |
| Short term  borrowed funds                                                                                                                         |       | 31,265                |       | — |   |
| Long Term  borrowed funds                                                                                                                          |       | 8,265                 |       | — |   |
| Junior  subordinated debt                                                                                                                          |       | 20,619                |       | 15,464 |   |
| Exchange  Liabilities                                                                                                                              |       | 13,290                |       | — |   |
| Minority  shareholder interest in subsidiaries                                                                                                     |       | 1,427                 |       | — |   |
| Accrued expenses  and other liabilities                                                                                                            |       | 6,109                 |       | 2,268 |   |
| Total  Liabilities                                                                                                                                 |       | 577,972               |       | 355,930 |   |
|                                                                                                                                               |       |                  |       |   |   |
| Commitments and  contingencies (Notes 6 and 11)                                                                                                    |       |                  |       |   |   |
|                                                                                                                                               |       |                  |       |   |   |
| Stockholders’  equity:                                                                                                                        |       |                  |       |   |   |
| Preferred stock,  $.01 par value, 20,000,000 shares authorized; no shares issued or outstanding                                                    |       | —                |       | — |   |
| Common stock,  $.01 par value, 10,000,000 authorized; 5,831,099 issued and outstanding as of  December 31, 2006 and 3,124,266 at December 31, 2005 |       | 54                    |       | 30 |   |
| Additional  paid-in capital                                                                                                                        |       | 73,345                |       | 30,431 |   |
| Retained  earnings (accumulated deficit)                                                                                                           |       | 878                   |       | (1,205 | ) |
| Accumulated  other comprehensive (loss)                                                                                                            |       | (709                  | )          | (554 | ) |
| Total  stockholders’ equity                                                                                                                   |       | 73,568                |       | 28,702 |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                |       | $                     | 651,540    |   | $ | 384,632 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements. 

71

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**THE BANK HOLDINGS AND SUBSIDIARIESConsolidated Statements of Operations (Dollars in thousands, except per share date)**
| ** **                                                                     | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Interest and dividend income:**                                              | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds  sold and other                                                  |       | $                                           | 950        |   | $ | 248 |   | $ | 96 |   |
| Debt securities,  taxable                                                      |       | 3,585                                       |       | 2,362 |   | 2,885 |   |
| Debt securities,  non-taxable                                                  |       | 307                                         |       | — |   | — |   |
| Dividends                                                                      |       | 242                                         |       | 83 |   | 34 |   |
| Loans, including  fees                                                         |       | 25,955                                      |       | 14,473 |   | 7,521 |   |
| **Total  interest and dividend income**                                        |       | 31,039                                      |       | 17,166 |   | 10,536 |   |
|                                                                           |       |                                        |       |   |   |   |   |
| **Interest expense:**                                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                                       |       | 12,881                                      |       | 6,677 |   | 3,443 |   |
| Other borrowed  funds                                                          |       | 2,202                                       |       | 667 |   | 226 |   |
| **Total  interest expense**                                                    |       | 15,083                                      |       | 7,344 |   | 3,669 |   |
|                                                                           |       |                                        |       |   |   |   |   |
| **Net interest income**                                                        |       | 15,956                                      |       | 9,822 |   | 6,867 |   |
|                                                                           |       |                                        |       |   |   |   |   |
| Provision for loan  losses                                                     |       | 771                                         |       | 1,069 |   | 764 |   |
| Net interest income,  after provision for loan losses                          |       | 15,185                                      |       | 8,753 |   | 6,103 |   |
|                                                                           |       |                                        |       |   |   |   |   |
| **Noninterest income:**                                                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges  on deposit accounts                                           |       | 261                                         |       | 206 |   | 136 |   |
| Other service  charges, commissions and fees                                   |       | 181                                         |       | 165 |   | 139 |   |
| Pre-underwriting  fees                                                         |       | 9                                           |       | 25 |   | 154 |   |
| Income on bank  owned life insurance                                           |       | 307                                         |       | 313 |   | — |   |
| Exchange fee  income                                                           |       | 448                                         |       | — |   | — |   |
| Unrealized gain  on trading securities                                         |       | 443                                         |       | 47 |   | 110 |   |
| Net gain on sale  of fixed assets                                              |       | 2                                           |       | 4 |   | — |   |
| Net gain/(loss)  on sale of available for sale securities                      |       | 31                                          |       | 12 |   | (119 | ) |
| **Total  noninterest income**                                                  |       | 1,682                                       |       | 772 |   | 420 |   |
|                                                                           |       |                                        |       |   |   |   |   |
| **Noninterest expense:**                                                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and  employee benefits                                                |       | 7,617                                       |       | 4,222 |   | 2,743 |   |
| Occupancy and  equipment                                                       |       | 1,921                                       |       | 1,532 |   | 1,330 |   |
| Marketing                                                                      |       | 527                                         |       | 335 |   | 241 |   |
| Data processing                                                                |       | 960                                         |       | 733 |   | 369 |   |
| Deposit and loan  servicing costs                                              |       | 604                                         |       | 259 |   | 213 |   |
| Accounting, and  legal                                                         |       | 371                                         |       | 515 |   | 519 |   |
| Other  professional services                                                   |       | 199                                         |       | 468 |   | 257 |   |
| Telephone and  data communications                                             |       | 305                                         |       | 170 |   | 138 |   |
| Other Expenses                                                                 |       | 1,078                                       |       | 589 |   | 432 |   |
| **Total  noninterest expense**                                                 |       | 13,582                                      |       | 8,823 |   | 6,242 |   |
| ** **                                                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income before income tax  provision and Minority Shareholder interests** | ** ** | 3,285                                       | ** ** | 702 | ** ** | 281 | ** ** |
| ** **                                                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Minority Shareholders  share of net income of subsidiaries                     |       | 127                                         |       | — |   | — |   |
| Income tax provision  (benefit)                                                |       | 1,075                                       |       | (710 | ) | — |   |
|                                                                           |       |                                        |       |   |   |   |   |
| **NET INCOME**                                                                 |       | $                                           | 2,083      |   | $ | 1,412 |   | $ | 281 |   |
|                                                                           |       |                                        |       |   |   |   |   |
| Net earnings per share:                                                        |       |                                        |       |   |   |   |   |
| Basic                                                                          |       | 0.51                                        |       | 0.45 |   | 0.10 |   |
| Diluted                                                                        |       | 0.49                                        |       | 0.41 |   | 0.09 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

72

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**THE BANK HOLDINGS AND SUBSIDIARIESConsolidated Statements of Stockholder’s Equity For the Years Ended December 31, 2006, 2005 and 2004**
| ** **                                                                                 | ** ** | ** **                                                         | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------|------------|------------|------------|----------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                 | ** ** | ** **                                                         | ** ** | **Shares of** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                                 | ** ** | **Comprehensive**                                                  | ** ** | **Common**         | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                 | ** ** | **Income/Loss**                                                    | ** ** | **Stock**          | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Income/Loss**   | ** ** | **Total**  | ** ** |
| ** **                                                                                 | ** ** | **(in thousands, except per share data)** | ** ** |
| ** **                                                                                 | ** ** | ** **                                                         | ** ** | ** **         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** ** | ** ** | ** ** |
| **Balance at December 31, 2003**                                                           |       |                                                               |       | 1,405,930          |       | 14         |       | 13,998         |       | (2,898          | )          | (261              | )          | 10,853     |       |
| Proceeds  from issuance of common stock, net of offering costs of approximately,  $300,000 |       |                                                               |       | 1,552,500          |       | 16         |       | 16,106         |       | —          |       | —            |       | 16,122     |       |
| Stock  options exercised                                                                   |       |                                                               |       | 13,900             |       | —     |       | 139            |       | —          |       | —            |       | 139        |       |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Net  income                                                                                |       | $                                                                  | 281        |               | —     |       | —     |           | —     |            | 281        |              | —     |       | 281        |   |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Compensation  expense related to stock options                                             |       |                                                               |       | —             |       | —     |       | 83             |       | —          |       | —            |       | 83         |       |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Other  comprehensive loss:                                                                 |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Unrealized  holding loss on securities available for sale arising during the year          |       | (221                                                               | )          |               |       |       |       |           |       |            |       |              |       |       |       |
| Less  reclassification adjustment for losses included in net Income                        |       | 119                                                                |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Net  unrealized holding losses                                                             |       | (102                                                               | )          | —             |       | —-    |       | —         |       | —-         |       | (102              | )          | (102       | )          |
| Comprehensive  income                                                                      |       | $                                                                  | 179        |               |       |       |       |           |       |            |       |              |       |       |       |   |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| **Balance at December 31, 2004**                                                           |       |                                                               |       | 2,972,330          |       | $          | 30         |           | $          | 30,326          |       | $                 | (2,617     | )          | $          | (363 | ) | $ | 27,376 |   |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Stock  options exercised                                                                   |       |                                                               |       | 2,000              |       | —     |       | 20             |       | —          |       | —            |       | 20         |       |
| Stock  dividend                                                                            |       |                                                               |       | 149,936            |       |       |       |           |       |            |       |              |       |       |       |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Net  income                                                                                |       | $                                                                  | 1,412      |               | —     |       | —     |           | —     |            | 1,412      |              | —     |       | 1,412      |   |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Compensation  expense related to stock options                                             |       |                                                               |       | —             |       | —     |       | 85             |       | —          |       | —            |       | 85         |       |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Other  comprehensive loss:                                                                 |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Unrealized  holding loss on securities available for sale arising during the year          |       | (179                                                               | )          |               |       |       |       |           |       |            |       |              |       |       |       |
| Less  reclassification adjustment for gains included in net Income                         |       | (12                                                                | )          |               |       |       |       |           |       |            |       |              |       |       |       |
| Net  unrealized holding losses                                                             |       | (191                                                               | )          | —             |       | —     |       | —         |       | —          |       | (191              | )          | (191       | )          |
| Comprehensive  income                                                                      |       | $                                                                  | 1,221      |               |       |       |       |           |       |            |       |              |       |       |       |   |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| **Balance at December 31, 2005**                                                           |       |                                                               |       | 3,124,266          |       | $          | 30         |           | $          | 30,431          |       | $                 | (1,205     | )          | $          | (554 | ) | $ | 28,702 |   |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Stock  options exercised                                                                   |       |                                                               |       | 20                 |       | —     |       | 11             |       |            |       | —            |       | 11         |       |
| Shares  issed for merger                                                                   |       |                                                               |       | 1,426,208          |       | 14         |       | 27,569         |       |            |       |              |       | 27,583     |       |
| Warrants  Exercised                                                                        |       |                                                               |       | 323,738            |       | 3          |       | 3,386          |       |            |       |              |       | 3,389      |       |
| Private  Placement                                                                         |       |                                                               |       | 678,740            |       | 7          |       | 11,532         |       |            |       |              |       | 11,539     |       |
| Stock  Dividend Feburary 15, 2007                                                          |       |                                                               |       | 278,127            |       |       |       |           |       |            |       |              |       |       |       |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Net  income                                                                                |       | $                                                                  | 2,083      |               | —     |       | —     |           | —     |            | 2,083      |              | —     |       | 2,083      |   |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Compensation  expense related to stock options                                             |       |                                                               |       | —             |       | —     |       | 416            |       | —          |       | —            |       | 416        |       |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Other  comprehensive loss:                                                                 |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Unrealized  holding loss on securities available for sale arising during the year          |       | 400                                                                |       |               |       |       |       |           |       |            |       |              |       |       |       |
| Unrealized  minimum projecgted benefit obligation of defined benefit plan                  |       | (522                                                               | )          |               |       |       |       |           |       |            |       |              |       |       |       |
| Less  reclassification adjustment for gains included in net Income                         |       | (33                                                                | )          |               |       |       |       |           |       |            |       |              |       |       |       |
| Net  unrealized holding losses                                                             |       | (155                                                               | )          | —             |       | —     |       | —         |       | —          |       | (155              | )          | (155       | )          |
| Comprehensive  income                                                                      |       | $                                                                  | 1,928      |               |       |       |       |           |       |            |       |              |       |       |       |   |
|                                                                                       |       |                                                               |       |               |       |       |       |           |       |            |       |              |       |       |       |
| **Balance at December 31, 2006**                                                           |       |                                                               |       | 5,831,099          |       | $          | 54         |           | $          | 73,345          |       | $                 | 878        |       | $          | (709 | ) | $ | 73,568 |   |

 

73

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**THE BANK HOLDINGS AND SUBSIDIARYConsolidated Statements of Cash Flows(Dollars in thousands)**
| ** **                                                                               | ** ** | **Periods Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash  flows from operating activities:**                                               | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                               |       | $                                             | 2,083      |   | $ | 1,412 |   | $ | 281 |   |
| Adjustments to  reconcile net income to cash provided by (used in) operating activities: |       |                                          |       |   |   |   |   |
| Provision for  loan losses                                                               |       | 771                                           |       | 1,069 |   | 764 |   |
| Stock option  compensation expense                                                       |       | 417                                           |       | 85 |   | 83 |   |
| Net amortization  of securities                                                          |       | 167                                           |       | 387 |   | 654 |   |
| Depreciation                                                                             |       | 650                                           |       | 520 |   | 445 |   |
| Activity of  trading securities, net                                                     |       | (2,507                                        | )          | (186 | ) | (978 | ) |
| Unrealized gain  on trading securities                                                   |       | (443                                          | )          | (47 | ) | (110 | ) |
| Activity of  trading securities, net                                                     |       |                                          |       |   |   |   |   |
| Income  Attrihutable to minority shareholders                                            |       | 127                                           |       | — |   | — |   |
| Realized  gain/loss on sales of available for sale securities, net                       |       | (31                                           | )          | (12 | ) | 119 |   |
| Activity in  exchange assets                                                             |       | 13,290                                        |       | — |   | — |   |
| Net change in:                                                                           |       |                                          |       |   |   |   |   |
| Other assets and  liabilities, net                                                       |       | (3,057                                        | )          | (362 | ) | 24 |   |
| **Net  cash provided by (used in) operating activities**                                 |       | 11,467                                        |       | 2,866 |   | 1,282 |   |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Cash  flows from investing activities:**                                               | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Activity in  available for sale securities:                                              |       |                                          |       |   |   |   |   |
| Proceeds from  sales, maturities, prepayments and calls                                  |       | 8,534                                         |       | 394 |   | 64,667 |   |
| Purchases                                                                                |       | (4,827                                        | )          | (4,377 | ) | (43,716 | ) |
| Activity of  securities held to maturity:                                                |       |                                          |       |   |   |   |   |
| Proceeds from  maturities, prepayments and calls                                         |       | 15,336                                        |       | 12,595 |   | 21,711 |   |
| Purchases                                                                                |       | (27,764                                       | )          | (23,686 | ) | (37,902 | ) |
| Activity in  equity securities, net                                                      |       | (1,175                                        | )          | 130 |   | (1,307 | ) |
| Investment in  non-bank subsidiaries, net                                                |       | (3,280                                        | )          | — |   | — |   |
| Additional  Investment in non-bank subsidiaries, net                                     |       | (442                                          | )          | — |   | — |   |
| Increase in bank  owned life insurance                                                   |       | (2,172                                        | )          | (312 | ) | (6,000 | ) |
| Loan  originations and principal collections, net                                        |       | (95,714                                       | )          | (84,718 | ) | (77,664 | ) |
| Cash and  equivalents acquired in acquisitions net of cash paid                          |       | 13,487                                        |       | — |   | (500 | ) |
| Purchases of  premises and equipment, net                                                |       | (936                                          | )          | (360 | ) | (1,399 | ) |
| **Net  cash used in investing activities**                                               |       | (98,953                                       | )          | (100,798 | ) | (82,110 | ) |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Cash  flows from financing activities:**                                               | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net increase in  deposits                                                                |       | 32,470                                        |       | 149,857 |   | 39,594 |   |
| Proceeds from  other borrowed funds, net                                                 |       | 31,530                                        |       | (30,500 | ) | 24,375 |   |
| Proceeds from  subordinated debentures                                                   |       |                                          |       | 15,464 |   | — |   |
| Proceeds from  private placement                                                         |       | 11,539                                        |       | — |   | — |   |
| Proceeds from  exercise of stock warrants                                                |       | 3,389                                         |       | — |   | — |   |
| Proceeds from  exercise of stock options                                                 |       | 10                                            |       | 20 |   | 139 |   |
| Net proceeds  from issuance of common stock                                              |       | —                                        |       | — |   | 16,122 |   |
| **Net  cash provided by financing activities**                                           |       | 78,938                                        |       | 134,841 |   | 80,230 |   |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Net  change in cash and cash equivalents**                                             |       | (8,548                                        | )          | 36,909 |   | (598 | ) |
|                                                                                     |       |                                          |       |   |   |   |   |
| **Cash  and cash equivalents at beginning of the period**                                |       | 42,271                                        |       | 5,362 |   | 5,960 |   |
| **Cash  and cash equivalents at end of the period**                                      |       | $                                             | 33,723     |   | $ | 42,271 |   | $ | 5,362 |   |
|                                                                                     |       |                                          |       |   |   |   |   |
| Supplementary  cash flow information:                                                    |       |                                          |       |   |   |   |   |
| Interest paid on  deposits and borrowed funds                                            |       | $                                             | 15,083     |   | $ | 7,344 |   | $ | 3,659 |   |
|                                                                                     |       |                                          |       |   |   |   |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

74

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**THEBANK HOLDINGS**

**Notes to Consolidated Financial Statements**

**December 31, 2006**

**NOTE 1 – BASIS OF PRESENTATION**

***Principlesof Consolidation and Basis of Presentation***

On July 9, 2003, thestockholders of Nevada Security Bank approved the exchange of their commonstock in Nevada Security Bank for common stock in the newly formed holdingcompany, The Bank Holdings.  Thistransaction was consummated on August 29, 2003 and was accounted for athistorical cost. The consolidated financial statements include the accounts ofThe Bank Holdings, its wholly-owned subsidiary, Nevada Security Bank, itswholly owned subsidiary Rocky Mountain Exchange, and its 75% owned subsidiaryGranite Exchange.  Nevada Security Bankwas organized on February 26, 2001 and opened for business on December 27,2001. Rocky Mountain Exchange (formerly Big Sky Property Exchange) and GraniteExchange were both purchased in March 2006. All significant inter-company balances and transactions have beeneliminated in consolidation.

In accordance withprovisions of Financial Accounting Statements Board (“FASB”) interpretation No.46 *Consolidation of Variable Interest Entities,*theCompany’s investment in The Bank Holdings Statutory Trust I, and NNB HoldingsStatutory Trust I, are not consolidated and they are accounted for under theequity method and included in other assets on the consolidated balancesheet.  The subordinated debenturesissued and guaranteed by the Company and held by the Trusts are reflected on theCompany’s consolidated balance sheet.

***Natureof Banking Activities***

TheBank Holdings is a bank holding company incorporated in Nevada on January 17,2003 and registered under the Bank Holding Company Act of 1956, asamended.  We conduct bank operationsthrough our principal subsidiary, Nevada Security Bank, a Nevadastate-chartered commercial bank.  We andNevada Security Bank are both headquartered in Reno, Nevada at 9990 Double RBoulevard.  We acquired all of theoutstanding shares of Nevada Security Bank on August 29, 2003.  On November 6, 2006, the Company acquired NNBHoldings, Inc. in Reno, Nevada and its subsidiary bank Northern Nevada Bankwhose branches became part of Nevada Security Bank.

Duringthe first quarter of 2006, the Company acquired two qualified intermediarycompanies, Rocky Mountain Exchange (formerly known as Big Sky PropertyExchange) and Granite Exchange, Inc. which facilitate tax-deferred real estatetransactions under Section 1031 of the Internal Revenue Code.  Rocky Mountain Exchange is located inBozeman, Montana, and Granite Exchange is headquartered in Roseville,California and has other sales offices in Hawaii and Las Vegas, Nevada.  Qualified intermediaries select the financialinstitution to hold depositor accounts created as part of the exchangetransactions.  The exchange balancesdeposited into the Bank should increase the Bank’s core deposits, decrease theBank’s loan to deposit ratio, and support future loan growth.  These subsidiaries have been consolidated onthe Company’s books.

TheCompany’s other direct subsidiaries are The Bank Holdings Statutory Trust I, aConnecticut statutory trust which was formed in November, 2005 solely tofacilitate the issuance of variable rate capital trust pass through securitiesand NNB Holdings Statutory Trust I which was formed in June 2005, and wasacquired by the Company in the merger with NNB Holdings, Inc.  This additional regulatory capital hasenabled the Company to follow previously established expansion plans without animpairment of risk-based capital ratios. Pursuant to FASB Interpretation No. 46 *Consolidationof Variable Interest Entities*(FIN 46R),**TheBank Holdings Statutory Trust**I and NNBHoldings Statutory Trust I are not reflected on a consolidated basis in thefinancial statements of the Company.

These entities arecollectively referred to herein as the Company. Segment information is presented in Note 17.

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The accounting andreporting policies of the Company conform to accounting principles generallyaccepted in the United States of America and general practices within thebanking industry.

***Useof Estimates***

In preparing consolidatedfinancial statements in conformity with generally accepted accountingprinciples in the United States of America and general practices within thebanking industry, management is required to make estimates and assumptions thataffect the reported amount of assets and liabilities as of the date of thebalance sheet and reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.  Materialestimates that are particularly susceptible to significant change in the nearterm relate to the determination of the allowance for loan losses, materialestimates that are susceptible to substantial change over the longer termrelated to the determination of loan origination costs, equity-basedcompensation, goodwill and income taxes.

***Cashand Cash Equivalents***

For purposes of theconsolidated statements of cash flows, cash and cash equivalents include cashon hand, demand amounts due from banks (including cash items in the process ofclearing), liquid money market funds and federal funds sold.  Cash flows from loans, deposits, and proceedsfrom issuance of common stock are reported net. The Company maintains amounts on account with other institutions which,at times, may exceed federally insured limits. A significant concentration exists with relation to deposits held atPacific Coast Bankers’ Bank, NSB’s primary correspondent bank. A significantconcentration exists with relation to deposits held at Countrywide Bank, adepository for the Company’s 1031 QI’s. The Company has not experienced any losses on such accounts.

***Securities***

Debt securities thatmanagement has the positive intent and ability to hold to maturity areclassified as “held to maturity” and recorded at amortized cost.  Securities not classified as held to maturityincluding equity securities with readily determinable fair values, areclassified as “available for sale” and are recorded at fair value, withunrealized gains and losses excluded from earnings and reported in othercomprehensive income.  Gains and losseson the sale of securities are recorded on the trade date and are determinedusing the specific identification method.

Management determines theappropriate classification of its investments at the time of purchase and mayonly change the classification under certain limited circumstances. Anytransfers between categories would be accounted for at fair value.  There were none during all periods underreview.

Purchase premiums anddiscounts are recognized in interest income using the interest method over theestimated life of the securities. Declines in the fair value of held-to-maturity and available-for-salesecurities below their cost that are deemed to be other than temporary arereflected in earnings as realized losses. In estimating other-than-temporary impairment losses, managementconsiders (1) the length of time and the extent to which the fair value hasbeen less than cost, (2) the financial condition and near-term prospects of theissuer, and (3) the intent and ability of the Company to retain its investmentin the issuer for a period of time sufficient to allow for any anticipatedrecovery in fair value.

***TradingAccount & Derivative Financial Instruments***

The Company’s “tradingaccount” consists of specific equity investments that are carried at marketvalue and separately reported in NOTE 4, “Securities”.  Unrealized gains and losses are included inearnings as non-interest income.  Gainsand losses on the sale of equities are recorded on the trade date and aredetermined using the specific identification method.

The Company has a policythat provides for the use of derivative financial instruments held or issuedfor “trading account” purposes.  Theseinstruments are utilized for risk management purposes, and are measured atmarket value with gains or losses represented in earnings.  Equity investments comprise the major portionof “trading account” assets. “Derivative financial instruments” are exchangetraded covered call options written on some, but not all, of such equityinvestments.  These options are carriedat market value and are recorded in other liabilities.

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***Loans***

The Company grants realestate, commercial and consumer loans to customers.  A substantial portion of the loan portfoliois represented by real estate loans throughout northern Nevada and northernCalifornia.  The ability of the Company’sborrowers to honor their contracts is dependent upon the real estate andgeneral economic conditions in these areas.

Loans are reported attheir outstanding unpaid principal balances reduced by the allowance for loanlosses, and any deferred fees or costs on originated loans.  Interest income is accrued on the unpaidprincipal balance.

Loan origination fees,net of certain deferred origination costs and purchase premiums and discountsare recognized as an adjustment to yield of the related loans over thecontractual life of the loan using both the effective interest and straightline method, based on the loan type.

***Allowancefor Loan Losses***

The allowance for loanlosses is established through a provision for loan losses charged toexpense.  Loan losses are charged againstthe allowance when management believes the collection of a loan balance isunlikely.  Subsequent recoveries, if any,are credited to the allowance.

The allowance for loanlosses is evaluated on a regular basis by management and is based uponmanagement’s periodic review of the collectibility of the loans in light ofhistorical peer bank experience, the nature and volume of the loan portfolio,adverse situations that may affect the borrower’s ability to repay, estimatedvalue of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective asit requires estimates that may be susceptible to significant revision as moreinformation becomes available.

The allowance consists ofspecific and general components.  Thespecific component relates to loans that are classified as doubtful,substandard or special mention.  For suchloans that are also classified as impaired, an allowance is established whenthe discounted cash flows (or collateral value or observable market price) ofthe impaired loan is lower than the carrying value of that loan.  The general component covers non-classifiedloans and is based on Company historical, other Nevada banks, and Uniform BankPerformance Report peer bank loss experience adjusted for qualitative factors.

A loan is consideredimpaired when, based on current information and events, it is probable that theCompany will be unable to collect the scheduled payments of principal orinterest when due according to the contractual terms of the loanagreement.  Factors considered bymanagement in determining impairment include payment status, collateral value,and the probability of collecting scheduled principal and interest paymentswhen due. Loans that experience insignificant payment delays and paymentshortfalls generally are not classified as impaired.

Management determines thesignificance of payment delays and payment shortfalls on a case-by-case basis,taking into consideration all of the circumstances surrounding the loan and theborrower, including the length of the delay, the reasons for the delay, theborrower’s prior payment record, and the amount of the shortfall in relation tothe principal and interest owed. Impairment is measured on a loan by loan basis for commercial andconstruction loans by either the present value of expected future cash flowsdiscounted at the loan’s effective interest rate, the loan’s obtainable marketprice, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smallerbalance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separatelyidentify individual consumer and residential loans for impairment disclosures,unless such loans are the subject of a restructuring agreement.

# ***Interest andfees on loans***

Intereston loans is recognized over the terms of the loans and is calculated under theeffective interest method.  The accrualof interest on impaired loans is discontinued when, in management’s opinion,the borrower may be

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unableto make payments as they become due.

The Company determines aloan to be delinquent when payments have not been made according to contractualterms, typically evidenced by nonpayment of a monthly installment by the duedate.  The accrual of interest on loansis discontinued at the time the loan is 90 days delinquent unless the credit iswell secured and in the process of collection. Personal loans are typically charged off no later than 180 daysdelinquent.

All interest accrued butnot collected for loans that are placed on non-accrual is reversed againstinterest income.  The interest on theseloans is accounted for on the cash-basis or cost-recovery method, untilqualifying for return to accrual.  Loansare returned to accrual status when all the principal and interest amountscontractually due are brought current and future payments are reasonablyassured.

Loan origination andcommitment fees and certain direct loan origination costs are deferred and thenet amount amortized as an adjustment to the related loan’s yield.  The Bank is generally amortizing theseamounts over the contractual life of the loan. Commitment fees, based upon a percentage of a customer’s unused line ofcredit, and fees related to standby letters of credit are recognized over thecommitment period.

# ***Transfers ofFinancial Assets***

Transfers of financialassets are accounted for as sales, when control over the assets has beensurrendered.  Control over transferredassets is deemed to be surrendered when (1) the assets have been isolated fromthe Company, (2) the transferee obtains the right (free of conditions thatconstrain it from taking advantage of that right) to pledge or exchange thetransferred assets, and (3) the Company does not maintain effective controlover the transferred assets through an agreement that both entities andobligates the Company to repurchase them before their maturity.

***Premisesand Equipment***

Premises and equipmentare carried at cost, less accumulated depreciation computed on thestraight-line method over the following estimated lives of the assets.
| Furniture and Equipment | 3 – 20 years |
|-------------------------|-------------------|
| Automobiles             | 3 years           |

 

Amortization of leaseholdimprovements is computed principally by the straight line method over the termof the lease or the estimated useful life of the assets, whichever isshorter.  Amortization expense on assetsacquired under capital leases, which are being amortized over the lease terms,is included with depreciation expense on owned assets.

# ***Non-MarketableSecurities***

Non-marketable securitiesare included in other equity securities on the balance sheet.  These securities include debt and equityinvestments acquired for various regulatory and investment and otherpurposes.  These securities are recordedat cost as we believe that the cost of these investments are initially the bestindication of estimated fair value unless there have been significantsubsequent negative developments that justify an adjustment.  The Bank, is a member of the Federal HomeLoan Bank (FHLB) system, is required to maintain an investment in capital stockof the FHLB in an amount equal to the greater of 1% of its outstanding homeloans or 5% of advances from the FHLB. The recorded amount of the FHLB stock equals its fair value because theshares can only be redeemed by the FHLB at the $100 per share par value.  The Bank also has an investment in PacificCoast Bankers’ Bancshares (PCBB) its correspondent bank, to facilitatetransactions between the two companies. The Bank has a small investment in a loan that qualifies as a “CommunityReinvestment Act” project.  The Companyhas made some additional equity investments in its financial qualifiedintermediaries and has a small investment in Carson River Community Bank whichwas opened during 2006.

***Pre-underwritingfees***

The Company hasagreements with third parties under which the Company performs certainpre-underwriting activities on SBA loans which are funded by the third party.These activities are conducted in the Silverado

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Bank branch.  The Company would be required to refund anyfee paid, in the event of delinquency, default, or early payoff during thefirst six months of the loan term. Management records a liability equal to 100% of the fee at the date thefee is received, less any commissions, fees or incentives paid to individualsinvolved in the transaction.  Thisliability is reduced ratably over the six month contingency period.

***Goodwilland Intangible Assets***

In connection with itsacquisition of the QI’s and NNB Holdings, the Company recorded the excess ofthe purchase price over the estimated fair value of the assets received andliabilities assumed as goodwill.  Thegoodwill resulting from these transactions represents that amount by which thepurchase price exceeded the fair value of the net assets acquired.  Intangible assets are generally acquired inan acquisition.  Intangible assets aresubject to amortization over their useful lives.  Among these intangible assets are coredeposit intangibles and non-core deposit intangibles which the Company willamortize over their estimated useful lives.

Goodwill is evaluatedperiodically at least annually for impairment. There was no impairment recognized for the years ended December 31,2006, 2005, or 2004 on the Company’s goodwill.

***IncomeTaxes***

The Company files itsincome taxes on a consolidated basis. The allocation of income tax expense represents each entity’sproportionate share of the consolidated provision for taxes.  Deferred income tax assets and liabilitiesare determined using the liability (or balance sheet) method.  Under this method, the net deferred tax assetor liability is determined based on the tax effects of the temporarydifferences between the book and tax bases of the various balance sheet assetsand liabilities and gives current recognition to changes in tax rates and laws.  Therefore, deferred taxes are recognized forthe tax consequences of temporary differences by applying enacted statutory taxrates applicable to future years to differences between tax financial statementcarrying amounts and the basis of existing assets and liabilities.  The effect on deferred taxes of a change intax rates would be recognized in income in the period that includes theenactment date.  During 2004 deferred taxassets were reduced by a valuation allowance. That valuation allowance was removed for 2005.

***SalaryContinuation Plan***

The Company has initiatedaction to provide certain key executives, or their designated beneficiaries,with annual benefits after retirement, until death.  These benefits would be substantiallyequivalent to those available under split-dollar life insurance policiespurchased by the Company on the lives of such key executives.  The Company has completed the final plan andagreements, and has accrued for these future benefits from the date of the plan.  At the consolidated balance sheet date, theamount of accrued benefits equals the then present value of the benefitsexpected to be provided to the key executives or their beneficiaries, inexchange for the executives’ services to that date.

In 2005, the Companyentered into salary continuation agreements with certain executiveofficers.  The plans provide for annuallifetime benefits.  The Plan, which istreated as a defined benefit plan, gave rise to Prior Service Costs andattendant intangible asset of $1.2 million as of January 1, 2005, which isbeing amortized on a straight line basis over an estimated average service lifeof eleven years.  As of December 31, 2006the total unrecognized Prior Service Costs were $922,000 and is now subject totreatment under FAS No. 158 as Other Comprehensive Expense under FAS No. 158.

The benefit obligationunder the plan totaled $2.0 million for the year ended December 31, 2006 and$1.5 million for the same period in 2005.

In connection with theseplans, the Company purchased single premium life insurance policies (BOLI) withcash surrender values totaling $11.9 million and $6.3 million at December 31,2006 and 2005, respectively.  On theconsolidated balance sheet, the cash surrender values are included in other assets.

***Officerand Director Deferred Compensation Plan***

The Company hasestablished a deferred compensation plan for certain members of the managementgroup and deferred fee plan for directors for the purpose of providing theopportunity for participants to defer compensation.  The Company bears the costs for the plan’sadministration and the interest earned on participant

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deferrals.  The related expense was not material for theyears ended December 31, 2006, 2005, and 2004. In connection with this plan, life insurance policies were purchasedwith cash surrender values totaling $468,000, $320,000 and $108,000 at December31, 2005 and 2004, respectively, which are included on the consolidated balancesheet in other assets.

***401(k)Savings Plan***

The 401(k) savings plan(the “Plan”) allows participant to defer, on a pre-tax basis, up to 15% oftheir salary (subject to Internal Revenue Service limitations) and accumulatetax-deferred earnings as a retirement fund. The Bank may make a discretionary contribution to match a specifiedpercentage of the first 6% of the participants’ contributions annually.  The matching contribution is discretionary;vests over a period of one year from participants’ hire date and are subject tothe approval of the Board of Directors.

***StockCompensation Plan***

At December 31, 2006, theCompany had a stock-based employee compensation plan, which is more fullydescribed in NOTE 14.  On January 1, 2006the Company adopted the FASB Statement No 123(R), *Accountingfor Share Based Payments.*  FAS123(R) requires all share-based payments to employees, including grants ofemployee stock options to be recognized in the financial statements based onthe grant-date fair value of the award. The fair value is amortized over the requisite service period (generallythe vesting period).  The Companypreviously accounted for the plan using the recognition and measurementprinciples of APB Opinion No. 25, *Accounting for StockIssued to Employees*, and related interpretations.

The Company has adoptedFAS 123(R) using the modified-prospective-transition method, compensation costrecognized in the year ending December 31, 2006 includes: a) compensation costfor all share-based awards granted prior to, but not yet vested as of January1, 2006, and b) compensation cost for all share-based awards granted subsequentto January 1, 2006.  The results of priorperiods have not been restated.

On December 28, 2005, theDirectors of The Bank Holdings approved the acceleration of non-qualified stockoptions granted under The Bank Holdings Stock Option Plan of 2002 asamended.  Non-qualified optionspreviously granted under this Plan were to be vested over a five year term.

The Company determinesthe fair value of each option grant on the grant date using the Black-Scholespricing model (1) that takes into account the stock price at the grant date,the exercise price, the expected life of the option, the volatility of theunderlying stock and the expected dividend yield and the risk-free interestrate over the expected life of the option
| Assumptions for determining fair values: | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Dividend yield                                               |       | 0.0                                                      | %          | 0.0                                                      | %          | 0.0                                                      | %          |
| Projected stock price volatility                             |       | 23.85                                                    | %          | 35.0                                                     | %          | 35.0                                                     | %          |
| Risk-free interest rate                                      |       | 4.69                                                     | %          | 4.86                                                     | %          | 4.11                                                     | %          |
| Expected life of options (in years)                          |       | 7.0                                                      |       | 7.0                                                      |       | 7.0                                                      |       |
| Fair value per  option                                       |       | $                                                        | 5.44       |                                                     | $          | 6.86                                                     |       | $ | 7.66 |   |
|                                                              |            |                                                          |            |                                                          |            |                                                          |            |  |  |  |

 

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(1)  TheBlack-Scholes option valuation model requires the input of highly subjectiveassumptions, including the expected life of the stock based award and stockprice volatility.  The assumptions listedabove represent management’s best estimates, but these estimates involveinherent uncertainties and the application of management judgment.  As a result, if other assumptions had beenused, the Company’s recorded compensation expense could have been materiallydifferent from that depicted in here.  Inaddition, the Company is required to estimate the expected forfeiture rate andonly recognize expense for those shares expected to vest.  If the Company’s actual forfeiture rate ismaterially different from the estimate, the share-based compensation expensecould be materially different.  Thedividend yield is based on the lack of historical cash dividends paid duringthe life of the company, while the projected stock price volatility is based onhistorical factors.  The Company uses theseven year zero coupon treasury rate as the risk-free interest rate.  The expected life of options (in years) isbased on limited historical data, since very few options have been exercisedand employee and directors exercise of awards have been based primarily on fourseparations, and two deaths.  The vestingperiod has been noted above.

# ***Income Per Common Share***

Income per share for allperiods presented in the Consolidated Statements of Operations is computedbased on

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the weighted averagenumber of shares outstanding during each period.  Options outstanding as of December 31, 2006were 659,935. The computation of basic and diluted earnings per weightedaverage share outstanding is as follows:
| ** **                                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2006 (1)**                           | ** ** | **2005 (1)** | ** ** | **2004 (1)** | ** ** |
|                                                                                              |       |                                        |       |   |   |   |   |
| Average number  of common shares outstanding                                                      |       | 4,117,351                                   |       | 3,122,809 |   | 2,884,131 |   |
| Effect of  dilutive options                                                                       |       | 119,834                                     |       | 167,577 |   | 96,807 |   |
| Effect of  dilutive warrants                                                                      |       | 52,937                                      |       | 153,470 |   | — |   |
| Average number  of common shares outstanding used to calculate diluted earnings per common  share |       | 4,290,122                                   |       | 3,443,856 |   | 2,980,938 |   |
|                                                                                              |       |                                        |       |   |   |   |   |
| Net  income/(loss)                                                                                |       | $                                           | 2,083      |   | $ | 1,412 |   | $ | 281 |   |
| Basic net income  (loss) per share                                                                |       | $                                           | .51        |   | $ | .45 |   | $ | 0.10 |   |
| Diluted net  income (loss) per share                                                              |       | $                                           | .49        |   | $ | .41 |   | $ | 0.09 |   |

 

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(1) Reflects the 5% StockDividend declared on February 15, 2007.

***Off-Balance Sheet Instruments***

In the ordinary course ofbusiness, the Company has entered into off-balance sheet instruments consistingof commitments to extend credit and standby letters of credit.  Such financial instruments are recorded inthe financial statements when they are funded.

***ComprehensiveIncome***

Accounting principlesgenerally require that recognized revenue, expenses, gains and losses beincluded in net income.  Although certainchanges in assets and liabilities, such as unrealized gains and losses onavailable-for-sale securities, are reported as a separate component of theequity section of the balance sheet, such items, along with net income, are componentsof comprehensive income.  Comprehensiveincome includes net income or loss and other comprehensive income or loss.  The Company’s only source of othercomprehensive income is derived from unrealized gains and losses on investmentsecurities available for sale. Reclassification adjustments, resulting from gains or losses oninvestment securities that were realized and included in the net income of thecurrent period that also had been included in other comprehensive income orloss as unrealized holding gains or losses in the period in which they arose,are excluded from comprehensive income of the current period.  The reconciliation of transactions affectingAccumulated Other Comprehensive Income is included in the ConsolidatedStatement of Shareholders’ Equity for the periods indicated.

***RecentAccounting Pronouncements***

**FASB 159**

InFebruary 2007, the FASB issued SFAS No. 159, *Fair Value Option for Financial Assets and Financial Liabilities,including an amendment of FASB Statement No. 115.* SFAS 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value at specified election dates. The fair value option may beapplied instrument by instrument with certain exceptions and is appliedgenerally on an irrevocable basis to the entire instrument. SFAS 159 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007. Early adoption is permitted under certaincircumstances. Management is evaluating the impact this Statement may have onthe Company’s financial statements.

**FASB 157**

InSeptember 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*. The statement defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements. The statement emphasizes that fair value is amarket-based measurement, not an entity-specific 

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measurementand establishes a fair value hierarchy. This statement also clarifies how theassumptions of risk and the effect of restrictions on sales or use of an asseteffect the valuation. SFAS 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years. Early adoption is permitted. Management is evaluating the impactthis Statement may have on the Company’s financial statements.

**EITF 06-04**

InSeptember 2006, the Emerging Issues Task Force (“EITF”) of the FASB ratifiedEITF Issue No. 06-4, *Accounting forDeferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements*, and EITF IssueNo. 06-5, *Accounting for Purchases ofLife Insurance – Determining the Amount That Could Be Realized in Accordancewith FASB Technical Bulletin No. 85-4, Accounting for Purchases of LifeInsurance*. EITF 06-4 provides that an employer should recognize aliability for future benefits based on the substantive agreement with theemployee. The Issue should be applied to fiscal years beginning afterDecember 15, 2007, with earlier application permitted. EITF 06-5 providesthat in determining the amount recognized as an asset, a policyholder shouldconsider the cash surrender value as well as any additional amounts included inthe contractual terms of the policy that will be paid upon surrender. The amountthat could be realized should be calculated at the individual policy level andconsider any probable contractual limitations, including the exclusion of anyadditional amounts paid for the surrender of an entire group of policies. TheIssue is effective for fiscal years beginning after December 15, 2007. Thebanking subsidiary of the Company has life insurance arrangements.  We are currently evaluating the impact ofadoption of this rule on the Company’s financial statements and results ofoperations.

**SAB 108**

InSeptember 2006, the Securities and Exchange Commission issued Staff AccountingBulletin (SAB) 108, *Considering the Effects ofPrior Year Misstatements**when QuantifyingMisstatements in Current Year Financial Statements*, expressing thestaff’s view regarding the process of quantifying financial statementmisstatements. SAB 108 requires that when quantifying misstatements for thepurposes of evaluating materiality, the effects on both the income statementand balance sheet should be considered. The Company has evaluated therequirements of SAB 108, and we have determined that the adoption of theseissues will not have a material impact on the Company’s financial statements orresults of operations.

**FASB FIN48**

InJune 2006, the FASB issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*, which provides clarification foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with SFAS No. 109, *Accounting for IncomeTaxes*. This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on de-recognition, classification, interestand penalties, accounting in interim periods, disclosure, and transition. TheInterpretation is effective for fiscal years beginning after December 31, 2006.Management does not believe that the implementation will have a material effecton the Company’s financial position, results of operations or cash flows.

Thelist of recent accounting pronouncements noted above, while not an exhaustivelist, includes those which we believe will, or may, have the greatestlikelihood of application to the Company’s consolidated balance sheets and/orconsolidated statements of operations. We believe that adoption of these standards will not have a materialimpact on our financial condition, results of operations, earnings per share orcash flow, however, no absolute assurance can be given that this in fact willoccur.

***Reclassification***

Various reclassificationshave been made to the consolidated balance sheet at December 31, 2006 and theconsolidated statements of operations for the periods ended December 31, 2005 and2004, in order to be consistent with the presentation as of December 31,2006.  Further, certain captions have hadrevisions to more accurately reflect activities of the Company.  There were no changes to previously reportedstockholders’ equity or net income.

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**NOTE 2 –BUSINESS COMBINATION**

Effective November6, 2006 the Company acquired NNB Holding, Inc. and its wholly owned subsidiaryNorthern Nevada Bank in an acquisition that was accounted for under thepurchase method of accounting.  Theresults of operations for the acquisition are included in the consolidatedfinancial statements since that date. The Company’s Board of Directors in reaching the decision to proceedwith the merger took into consideration information and advice from severalspecialists, including investment bankers and legal advisors.  The Board of Directors considered a number offactors (refer to the Joint Proxy Statement-Prospectus for all relevant factorsand discussion), some of which are indicated below, without assigning any specificor relative weights to the factors:

·     The consideration providedfor in the merger agreement represents fair consideration.

·     The capital of theconsolidated institution will provide a better opportunity to expand andleverage the overall expense structure of the consolidated company.

·     The current and prospectiveeconomic environment and increasing regulatory and competitive burdens andconstraints facing financial institutions generally.

·     The consolidation occurringin the banking industry and the increased competition from other financialinstitutions in Nevada and California.

·     The similarity of culturesand other attributes of NNB Holdings and Bank Holdings.

·     The capacities of the Companyand NNB Holdings for enhanced operating efficiencies.

·     The financialanalysis and presentation of the Company’s investment banking firm and itsopinion that the consideration to be received is fair, from a financial pointof view, to the Company’s shareholders.

The recordedpurchase price for NNB Holdings, and Northern Nevada Bank was $35.1 million,which included cash of approximately $7.5 million and 1,426,208 shares of theCompany stock valued at $19.34 per share. The Company recorded several intangible assets connected with themerger.  Before tax effects, a coredeposit intangible of $1.6 million was recorded with an estimated life of 7years, a non-core deposit intangible of $100 thousand with a life about 1 yearwas also recorded along with a negative loan intangible of $(300) thousand witha life of about 4.5 years.  These itemsare to be amortized on our financial statements and our tax returns.  Goodwill is subject to an annual impairmenttest was recorded in the amount of $23 million.

The earnings pro-formaof the Bank Holdings and its subsidiaries combined with NNB Holdings, Inc. andits subsidiary Northern Nevada Bank as if the acquisition had taken place as ofJanuary 1, 2005 is as follows:

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**Consolidated Pro-formaStatement of Operations (Unaudited)**

 
| ** **                                                                      | ** ** | **For the Years Ended**     | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                      | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
| **(dollars in thousands, except per share data)** | ** ** | ** **                  | ** ** |
|                                                                            |       |                        |       |   |   |
| **Interest**                                                                    |       |                        |       |   |   |
| Interest and  dividend income                                                   |       | $                           | 40,417     |   | $ | 25,981 |   |
| Interest expense                                                                |       | 18,985                      |       | 10,364 |   |
| **Net interest income**                                                         |       | 21,432                      |       | 15,617 |   |
|                                                                            |       |                        |       |   |   |
| Provision for  loan losses                                                      |       | 991                         |       | 1,483 |   |
|                                                                            |       |                        |       |   |   |
| Net interest  income after provision for loan losses                            |       | 20,441                      |       | 14,134 |   |
|                                                                            |       |                        |       |   |   |
| Non-interest  income                                                            |       | 1,856                       |       | 970 |   |
| Non-interest  expense                                                           |       | 17,464                      |       | 12,726 |   |
|                                                                            |       |                        |       |   |   |
| Net income  before taxes                                                        |       | 4,833                       |       | 2,378 |   |
|                                                                            |       |                        |       |   |   |
| Income tax  (benefit) expense                                                   |       | 1,594                       |       | (146 | ) |
| Minority  shareholders share of net income of subsidiaries                      |       | 127                         |       | — |   |
| **Net  income**                                                                 |       | $                           | 3,112      |   | $ | 2,524 |   |
| ** **                                                                      |       |                        |       |   |   |
| Earnings per share                                                              |       |                        |       |   |   |
| Basic                                                                           |       | $                           | 0.76       |   | $ | 0.57 |   |
| Diluted                                                                         |       | $                           | 0.73       |   | $ | 0.53 |   |

 

 

The followingtable summarizes the Company’s estimated fair value at the date of acquisitionNovember 6, 2006.

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|                             | ** ** | **Dollars in thousands** | ** ** |
|-----------------------------|------------|------------------------------------|------------|
| Assets:                     |       |                               |       |
| Cash and due from banks     |       | $                                  | 6,129      |   |
| Federal funds               |       | 14,585                             |       |
| Non-marketable securities   |       | 787                                |       |
| Loans, net                  |       | 119,543                            |       |
| Accrued interest receivable |       | 640                                |       |
| Premises and equipment, net |       | 4,939                              |       |
| Intangibles                 |       | 1,873                              |       |
| Goodwill                    |       | 23,061                             |       |
| Other assets                |       | 3,972                              |       |
| Total Assets                |       | $                                  | 175,529    |   |
|                        |       |                               |       |
| Liabilities:                |       |                               |       |
| Deposits                    |       | $                                  | 126,329    |   |
| Accrued interest payable    |       | 148                                |       |
| FHLB term advances          |       | 8,500                              |       |
| Subordinated debt           |       | 5,000                              |       |
| Other liabilities           |       | 469                                |       |
| Total Liabilities           |       | $                                  | 140,446    |   |
|                        |       |                               |       |
| Net Assets:                 |       | $                                  | 35,083     |   |

 

Effective March24, 2006 the Company acquired Big Sky Property Exchange of Bozeman, Mt. fortotal consideration of $120,000.  TheCompany subsequently incorporated Big Sky Property Exchange as a NevadaCorporation which name was changed to Rocky Mountain Exchange during the year.

Effective March28, 2006 the Company acquired Granite Exchange, LLC of Roseville, CA. which wassubsequently merged into Granite Exchange, a Nevada Corporation which qualifiedas a foreign corporation for doing business in the State of California.  The total consideration in the acquisition ofa 75% interest in Granite Exchange was approximately $3.9 million.  Both of these acquisitions were accounted forunder the purchase method of accounting.

The recorded cashprice for the above qualified intermediaries was $4 million.  The Company recorded goodwill in connectionwith the acquisitions.  Goodwill issubject to an annual impairment test for book and tax purposes and was recordedin the amount of $5 million.  The pro-formaresults of operations for these acquisitions are not meaningful, since they arenot materially different than the reported consolidated results.  The following table represents the estimatedfair values of the assets and liabilities acquired.

The results ofoperations for the acquisitions are included in the consolidated financialstatements since that date.  The Company’sBoard of Directors in reaching the decision to proceed with the acquisitionstook into consideration information and advice from several specialists,including investment bankers.  The Boardof Directors considered a number of factors, some of which are indicated below,without assigning any specific or relative weights to the factors:

·     The consideration providedfor in the acquisitions agreement represents fair consideration.

·     The capital of theconsolidated institution will provide a better opportunity to expand andleverage the overall expense structure of the consolidated company.

·     The current and prospectiveeconomic environment and increasing regulatory and competitive burdens andconstraints facing qualified intermediary companies generally.

·     The similarity of financialactivities in a qualified intermediary company and Nevada Security Bank.

·     The capacities of the Companyand for enhanced operating efficiencies.

·     The internal and externalindependent fair market financial analysis and presentation of the independentappraiser and his opinion that the consideration received is fair, from afinancial point of view, to the Company’s shareholders.

The recorded cashpurchase prices for the above qualified intermediary companies was $4 million.The Company recorded goodwill connected with the acquisitions.  Goodwill is subject to an annual impairmenttest

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and was recordedin the amount of $5 million.  Thefollowing table represents the estimated fair values of the assets andliabilities acquired:
|                                         | ** ** | **(dollars in thousands)** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| **Assets:**                             |       |                                 |       |
| Cash and cash  equivalents              |       | $                                    | 210        |   |
| Premises and  equipment, net            |       | 106                                  |       |
| Goodwill                                |       | 5,298                                |       |
| Other assets                            |       | 34                                   |       |
| **Total Assets**                        |       | $                                    | 5,649      |   |
|                                    |       |                                 |       |
| **Liabilities:**                        |       |                                 |       |
| Notes payable                           |       | 187                                  |       |
| Accrued interest  and other liabilities |       | 142                                  |       |
| **Total Liabilities**                   |       | 329                                  |       |
|                                    |       |                                 |       |
| **Net Assets**                          |       | $                                    | 5,320      |   |

 

**NOTE 3 –RESTRICTIONS ON CASH AND AMOUNT DUE FROM BANKS**

The Company is requiredto maintain average balances on hand or with the Federal Reserve Bank.  At December 31, 2006 and 2005, these reservebalances required amounted to approximately $1.4 million and $1.1 million, respectively.

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**NOTE 4 –SECURITIES**

The amortized cost andfair value of securities with gross unrealized gains and losses are as follows:
|                                      | ** ** | **As of December 31, 2006** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|
| ** **                           | ** ** | **Amortized  Cost**                             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair  Value** | ** ** |
| ** **                           | ** ** | **(Dollars in thousand)**             | ** ** |
|                                 |       |                                            |       |   |   |   |   |   |   |
| Securities  available for sale       |       |                                            |       |   |   |   |   |   |   |
| U.S. Government and federal agencies |       | $                                               | 10,347     |   | $ | 4 |   | $ | (246 | ) | $ | 10,105 |   |
| State and municipal                  |       | 500                                             |       | — |   | (6 | ) | 494 |   |
| Corporate                            |       | 3,611                                           |       | 12 |   | (24 | ) | 3,599 |   |
| Preferred securities                 |       | 404                                             |       | 4 |   | — |   | 408 |   |
| Mortgage-backed                      |       | 1,758                                           |       | — |   | (27 | ) | 1,731 |   |
| Total securities available for sale  |       | $                                               | 16,620     |   | $ | 20 |   | $ | (303 | ) | $ | 16,337 |   |
|                                 |       |                                            |       |   |   |   |   |   |   |
| Securities held  to maturity         |       |                                            |       |   |   |   |   |   |   |
| U.S. Government and federal agencies |       | $                                               | 25,338     |   | $ | 57 |   | $ | (102 | ) | $ | 25,293 |   |
| State and municipal                  |       | 14,642                                          |       | 82 |   | (25 | ) | 14,699 |   |
| Corporate                            |       | 789                                             |       | 20 |   | — |   | 809 |   |
| Mortgage-backed                      |       | 35,821                                          |       | 13 |   | (818 | ) | 35,016 |   |
| Total securities held to maturity    |       | $                                               | 76,590     |   | $ | 172 |   | $ | (945 | ) | $ | 75,817 |   |
|                                 |       |                                            |       |   |   |   |   |   |   |
| Trading equity  securities           |       | $                                               | 3,648      |   | $ | 654 |   | $ | (3 | ) | $ | 4,299 |   |

 
|                                       | ** ** | **As of December 31, 2005**         | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | **Amortized  Cost**                 | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair  Value** | ** ** |
| ** **                            | ** ** | **(Dollars in thousand)** | ** ** |
|                                  |       |                                |       |   |   |   |   |   |   |
| Securities available  for sale        |       |                                |       |   |   |   |   |   |   |
| U.S. Government  and federal agencies |       | $                                   | 16,470     |   | $ | — |   | $ | (470 | ) | $ | 16,000 |   |
| State and  municipal                  |       | 500                                 |       | — |   | (16 | ) | 484 |   |
| Corporate                             |       | 1,032                               |       | — |   | (26 | ) | 1,006 |   |
| Mortgage-backed                       |       | 2,064                               |       | — |   | (42 | ) | 2,022 |   |
| Total securities  available for sale  |       | $                                   | 20,066     |   | $ | — |   | $ | (554 | ) | $ | 19,512 |   |
|                                  |       |                                |       |   |   |   |   |   |   |
| Securities held to  maturity          |       |                                |       |   |   |   |   |   |   |
| U.S. Government  and federal agencies |       | $                                   | 20,740     |   | $ | — |   | $ | (222 | ) | $ | 20,518 |   |
| State and  municipal                  |       | 1,412                               |       | 28 |   | (3 | ) | 1,437 |   |
| Corporate                             |       | 1,284                               |       | 26 |   | — |   | 1,310 |   |
| Mortgage-backed                       |       | 40,873                              |       | 27 |   | (1,117 | ) | 39,783 |   |
| Total securities  held to maturity    |       | $                                   | 64,309     |   | $ | 81 |   | $ | (1,342 | ) | $ | 63,048 |   |
|                                  |       |                                |       |   |   |   |   |   |   |
| Trading equity  securities            |       | $                                   | 1,141      |   | $ | 146 |   | $ | (4 | ) | $ | 1,283 |   |

 

At December 31,2006 and 2005, securities in the investment portfolio with a carrying value of$64.0 million and $73.2 million, respectively, were pledged as collateral orfor other purposes as required or permitted by law.  Of the amounts pledged, $56.5 million waspledged for FHLB borrowing as of December 31, 2006.

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The amortized cost andfair value of debt securities by contractual maturity at December 31, 2006 isshown below.  Over certain interest rateenvironments, some, or all of these securities may be called for redemption bytheir issuers prior to the scheduled maturities.  Further, maturities within themortgage-backed securities portfolio may differ from scheduled and contractualmaturities because the mortgages underlying the securities may be called forredemption or repaid without penalties. Therefore, these securities are not included in the maturity categoriesin the following maturity summary.
|                                 | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **Amortized  Cost**              | ** ** | **Fair  Value**                | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| Within one year                 |       | $                                | 2,500      |                           | $          | 2,479 |   | $ | 9,215 |   | $ | 9,139 |   |
| After 1 year  through 5 years   |       | 4,736                            |       | 4,625                          |       | 12,185 |   | 12,234 |   |
| After 5 years  through 10 years |       | 3,642                            |       | 3,523                          |       | 8,919 |   | 8,939 |   |
| After 10 years                  |       | 3,984                            |       | 3,979                          |       | 10,450 |   | 10,489 |   |
| Mortgage-backed  securities     |       | 1,758                            |       | 1,731                          |       | 35,821 |   | 35,016 |   |
|                            |       | $                                | 16,620     |                           | $          | 16,337 |   | $ | 76,590 |   | $ | 75,817 |   |

 

For the year endedDecember 31, 2006 realized gains and losses from sales of securities availablefor sale were approximately $11,000 in gains and $3,000 in losses as comparedto $8,000 in gains for the same period in 2005 and gross losses of $119,000 forthe same period in 2004.  Realized gainsand losses in the trading account were $29,000 in gains and $6,000 in lossesfor the period ending 2006 as compared to $4,000 in gains for 2005.  The results of these activities resulted inthis year 2006 net realized gains of $31,000. The trading account had net unrealized gains of approximately $443,000for the year ended December 31, 2006 as compared to $47,000 for 2005.

Information pertaining tosecurities with gross unrealized losses at December 31, 2006 and 2005,aggregated by investment category and length of time that individual securitieshave been in a continuous loss position, is as follows:
|                                    | ** ** | **As of December 31, 2006** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|
| ** **                         | ** ** | **Less Than Twelve Months**      | ** ** | **Over Twelve Months** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **Fair  Value**                                 | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)**            | ** ** |
| Securities  available-for-sale     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and federal agency |       | $                                               | 8,715      |   | $ | (244 | ) | $ | 998 |   | $ | (2 | ) | $ | 9,713 |   | $ | (246 | ) |
| State and municipal                |       | 494                                             |       | (6 | ) | — |   | — |   | 494 |   | (6 | ) |
| Corporate                          |       | 1,786                                           |       | (20 | ) | 495 |   | (4 | ) | 2,281 |   | (24 | ) |
| Mortgage-backed securities         |       | 1,731                                           |       | (27 | ) | — |   | — |   | 1,731 |   | (27 | ) |
|                               |       | $                                               | 12,726     |   | $ | (297 | ) | $ | 1,493 |   | $ | (6 | ) | $ | 14,219 |   | $ | (303 | ) |
| Securities  held-to-maturity       |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and federal agency |       | $                                               | 1,725      |   | $ | (5 | ) | $ | 13,864 |   | $ | (97 | ) | $ | 15,589 |   | $ | (102 | ) |
| State and municipal                |       | 5,183                                           |       | (25 | ) | — |   | — |   | 5,183 |   | (25 | ) |
| Mortgage-backed securities         |       | 4,154                                           |       | (30 | ) | 28,396 |   | (788 | ) | 32,550 |   | (818 | ) |
|                               |       | $                                               | 11,062     |   | $ | (60 | ) | $ | 42,260 |   | $ | (885 | ) | $ | 53,322 |   | $ | (945 | ) |

 

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|                                    | ** ** | **As of December 31, 2005** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|
| ** **                         | ** ** | **Less Than Twelve Months**      | ** ** | **Over Twelve Months** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **Fair  Value**                                 | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)**            | ** ** |
| Securities  available-for-sale     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and federal agency |       | $                                               | 1,983      |   | $ | (11 | ) | $ | 14,017 |   | $ | (459 | ) | $ | 16,000 |   | $ | (470 | ) |
| State and municipal                |       | —                                          |       | — |   | 484 |   | (16 | ) | 484 |   | (16 | ) |
| Corporate                          |       | 525                                             |       | (5 | ) | 481 |   | (21 | ) | 1,006 |   | (26 | ) |
| Mortgage-backed securities         |       | 1,946                                           |       | (39 | ) | 76 |   | (3 | ) | 2,022 |   | (42 | ) |
|                               |       | $                                               | 4,454      |   | $ | (55 | ) | $ | 15,058 |   | $ | (499 | ) | $ | 19,512 |   | $ | (554 | ) |
| Securities  held-to-maturity       |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and federal agency |       | $                                               | 10,068     |   | $ | (52 | ) | $ | 7,223 |   | $ | (171 | ) | $ | 17,291 |   | $ | (223 | ) |
| State and municipal                |       | 250                                             |       | (2 | ) | — |   | — |   | 250 |   | (2 | ) |
| Mortgage-backed securities         |       | 11,260                                          |       | (188 | ) | 25,598 |   | (929 | ) | 36,858 |   | (1,117 | ) |
|                               |       | $                                               | 21,578     |   | $ | (242 | ) | $ | 32,821 |   | $ | (1,100 | ) | $ | 54,399 |   | $ | (1,342 | ) |

 

Management evaluatessecurities for other-than-temporary impairment at least on a quarterly basis,and more frequently when economic or market concerns warrant suchevaluation.  Consideration is given to;1) the length of time and the extent to which the fair value has been less thancost, 2) the financial condition and near-term prospects of the issuer, and 3)the intent and ability of the Company to retain its investment in the issuerfor a period of time sufficient to allow for any anticipated recovery in fairvalue.

At December 31, 2006,debt securities had an aggregate depreciation of less than 1.1% from theCompany’s amortized cost basis.  In theavailable-for-sale portfolio, twenty-one securities have an unrealizedloss.  In two of those securities theunrealized loss has exceeded one year. There are ninety-nine securities in the held-to-maturity portfolio thathave an unrealized loss.  In seventy-sixof those securities the losses have exceeded one year.  In analyzing an issuer’s financial condition,management considers whether the securities are issued by the federalgovernment or its agencies, whether downgrades by bond rating agencies haveoccurred, and industry analysts’ reports. As management has the ability and intent to hold debt securities untilmaturity, or for the foreseeable future if classified as available-for-sale, nodeclines are deemed to be other than temporary, and there are no declines invalue that are not related to the current interest rate environment.

At December 31, 2005,debt securities had an aggregate depreciation of less than 2.2% from theCompany’s amortized cost basis.  None ofthese unrealized losses was deemed to be other than temporary.  These unrealized losses related primarily tofluctuations in the interest rate environment at that time.

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**NOTE 5 – LOANS**

A summary of the balancesof loans is as follows:
|                                  | ** ** | **December 31,**                | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)** | ** ** |
|                             |       |                                 |       |   |   |
| USDA  Agricultural               |       | $                                    | 12,698     |   | $ | 13,528 |   |
|                             |       |                                 |       |   |   |
| Commercial and  industrial       |       | 74,368                               |       | 38,429 |   |
|                             |       |                                 |       |   |   |
| Real Estate:                     |       |                                 |       |   |   |
| Construction                     |       | 153,761                              |       | 74,189 |   |
| Term                             |       | 215,052                              |       | 110,060 |   |
|                             |       |                                 |       |   |   |
| Consumer loans                   |       | 7,979                                |       | 8,979 |   |
|                             |       | 463,858                              |       | 245,185 |   |
|                             |       |                                 |       |   |   |
| Less: Allowance  for loan losses |       | 5,430                                |       | 2,655 |   |
| Net unearned loan fees           |       | 997                                  |       | 356 |   |
| Loans, net                       |       | $                                    | 457,431    |   | $ | 242,174 |   |

 

An analysis of theallowance for loan losses is as follows:
|                                             | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)**        | ** ** |
|                                        |       |                                        |       |   |   |   |   |
| Balance at  beginning of year               |       | $                                           | 2,655      |   | $ | 1,586 |   | $ | 822 |   |
| Provision for  loan losses                  |       | 771                                         |       | 1,069 |   | 764 |   |
| Allowance  acquired from NNB Holdings, Inc  |       | 1,951                                       |       | — |   | — |   |
| Loans  charged-off                          |       | —                                      |       | — |   | — |   |
| Recoveries of  loans previously charged-off |       | 53                                          |       | — |   | — |   |
| Balance at end of year                      |       | $                                           | 5,430      |   | $ | 2,655 |   | $ | 1,586 |   |

 

The Company also carriesan allowance for undisbursed loan commitments which is reported as an “otherliability”.  At December 31, 2006 and2005 such allowance was $334,000, and $225,000, respectively.

The Company had no loanswhich were classified as troubled restructured debt as of December 31, 2006 or2005.  The Company had two loans onnon-accrual in the amount of $549,000 as of December 31, 2006 and none as of2005, as well as no loans past due greater than 90 days and still accruing asof December 31, 2006 or 2005.

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**NOTE 6 – PREMISES AND EQUIPMENT**

A summary of the cost andaccumulated depreciation of premises and equipment is as follows:
|                           | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                      |       |                  |       |   |   |
| Premises:                 |       |                  |       |   |   |
| Land                      |       | $                     | 2,300      |   | $ | — |   |
| Buildings                 |       | 1,982                 |       | — |   |
| Leasehold Improvements    |       | 1,746                 |       | 1,620 |   |
| Furniture and Equipment   |       | 5,351                 |       | 2,750 |   |
|                      |       | 11,379                |       | 4,370 |   |
|                      |       |                  |       |   |   |
| Accumulated  depreciation |       | (3,522                | )          | (1,507 | ) |
|                      |       | $                     | 7,857      |   | $ | 2,863 |   |

 

Pursuant to the terms ofnon-cancelable lease agreements in effect at December 31, 2005, pertainingCompany premises, future minimum rent commitments (in thousands) under variousoperating leases are as follows:
| Year Ending December 31, | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2007                                    |       | $          | 927        |   |
| 2008                                    |       | 970        |       |
| 2009                                    |       | 992        |       |
| 2010                                    |       | 871        |       |
| 2011                                    |       | 803        |       |
| Thereafter                              |       | 3,512      |       |
| **Total**                               |       | $          | 8,075      |   |

 

The leases containoptions to extend for periods of time from one to a maximum of fifteenyears.  Total rent expense for theperiods ended December 2006, 2005 and 2004, amounted to approximately $836,000,$648,000 and $324,000, respectively.  AtDecember 31, 2006 there were no leasing transactions with related parties, norwere there any capital leases.

**NOTE 7 – DEPOSITS**

At December 31,2006, the scheduled maturities of time deposits, including IRA accounts are asfollows:
| (in thousands)        | ** ** | **Under $100** | ** ** | **Over $100** | ** ** | **Total** | ** ** |
|----------------------------|------------|---------------------|------------|--------------------|------------|-----------|------------|
| Three months or  less      |       | $                   | 49,027     |               | $          | 30,072    |       | $ | 79,099 |   |
| Over three to  six months  |       | 44,366              |       | 9,058              |       | 53,424    |       |
| Over six to  twelve months |       | 13,484              |       | 23,293             |       | 36,777    |       |
| Over twelve  months        |       | 53,991              |       | 4,163              |       | 58,154    |       |
| Total                      |       | $                   | 160,868    |               | $          | 66,586    |       | $ | 227,454 |   |

 

At December 31, 2006 and,2005, the Bank’s specialized program of tax free exchange deposits aggregated$70 million and $96 million, respectively. At December 31, 2006 and 2005 theBank had brokered deposits in the amount of $135 million and $43 million,respectively.

**NOTE 8 –OTHER BORROWED FUNDS**

The Company has enteredinto two agreements with correspondent banks under which it can purchasefederal funds up to $11.5 million.  Theinterest charged on borrowings is determined by the lending institution at the

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time of theborrowing.  These lines of credit are forshort-term use, are unsecured and are renewed on an annual basis.  There were no balances outstanding underthese agreements at December 31, 2006, and 2005.

The Company also has anagreement with the Federal Home Loan Bank of San Francisco (FHLB) to borrowfunds.  Advances are collateralized byqualifying assets pursuant to collateral agreements with FHLB.  There were no overnight advances outstandingas of December 31, 2005 and $39.0 million outstanding as of December 31,2006.  Of the amount outstanding atDecember 31, 2006 $8.0 million were term advances acquired in the merger withNNB Holdings, and Northern Nevada Bank with $1.0 million maturing in 2008, $2.0million maturing in 2009 and $5.0 maturing in 2010.

As part of theacquisition of the two exchange intermediaries the Company issued two notespayable in the amount of approximately $265,000 each with one and two yearmaturities payable at prime.  The oneyear note was paid in full subsequent to year end.  The Company also acquired debt due to anotherfinancial institution in the amount of $187,000 which was paid off during thesecond quarter of 2006.

Other subordinated debtas of December 31, 2006 includes $15.5 million in subordinated debenturesissued by the Company and $5.1 million acquired in the merger with NNBHoldings, Inc. Of the debentures issued by the Company, $4.2 million of suchfunds were invested in the Bank to maintain adequate capital levels.

**NOTE 9 –INCOME TAXES**

The cumulative taxeffects of the primary temporary differences which created deferred tax assetsand liabilities at December 31, 2006 and 2005 are as follows:

The components of incometax benefit for the years presented were as follows:
|                               | ** ** | **December 31,**                | ** ** |
|-------------------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)** | ** ** |
| Current expense               |       |                                 |       |   |   |   |   |
| Federal                       |       | $                                    | 784        |   | $ | — |   | $ | — |   |
| State                         |       | 50                                   |       | 6 |   | — |   |
|                          |       | $                                    | 834        |   | $ | 6 |   | $ | — |   |
|                          |       |                                 |       |   |   |   |   |
| Deferred tax  (benefit)       |       |                                 |       |   |   |   |   |
| Federal                       |       | $                                    | 227        |   | $ | (679 | ) | $ | — |   |
| State                         |       | 14                                   |       | (37 | ) | — |   |
|                          |       | $                                    | 241        |   | $ | (716 | ) | $ | — |   |
|                          |       |                                 |       |   |   |   |   |
| Income tax expense  (benefit) |       | $                                    | 1,075      |   | $ | (710 | ) | $ | — |   |

 

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The following were thesignificant components of deferred tax assets and liabilities:
|                                                    | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                               |       |                  |       |   |   |
| Deferred tax  assets:                              |       |                  |       |   |   |
| Net operating loss carryforwards                   |       | $                     | 217        |   | $ | 272 |   |
| Allowance for loan losses                          |       | 1,743                 |       | 730 |   |
| Deferred Compensation                              |       | 627                   |       | 185 |   |
| Development stage costs                            |       | —                |       | 49 |   |
| Benefit plan prior service cost                    |       | 307                   |       | — |   |
| Unrealized loss on investment securities           |       | 94                    |       | — |   |
| Other                                              |       | 93                    |       | 127 |   |
| Total deferred tax assets                          |       | $                     | 3,081      |   | $ | 1,363 |   |
|                                               |       |                  |       |   |   |
| Deferred tax  liabilities:                         |       |                  |       |   |   |
| Deferred Loan Costs                                |       | $                     | 356        |   | $ | 324 |   |
| Premises and equipment resulting from depreciation |       | 935                   |       | 248 |   |
| Deferred Revenue                                   |       | 95                    |       | — |   |
| Other                                              |       | 35                    |       | 28 |   |
| Total deferred tax liabilities                     |       | $                     | 1,421      |   | $ | 600 |   |
|                                               |       |                  |       |   |   |
| Net deferred tax  asset                            |       | $                     | 1,660      |   | $ | 763 |   |

 

At December 31, 2006 and2005 the Company had approximately $640 thousand and $801 thousand,respectively, of operating loss carryforwards for federal income tax purposesthat expire beginning in 2021.  AtDecember 31, 2004, the net deferred tax asset available of $852,000 was offsetby an equal valuation allowance.

The income tax provisiondiffers from the amount of income tax determined by applying the US federalincome tax rate to pretax income for the years ended December 31, 2006, 2005and 2004 due to the following:
|                                                      | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** | ** ** | ** ** | **2004** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|------------|------------|----------|------------|------------|------------|
| Computed  “expected” tax provision         |       | $        | 1,215      |       | 37         | %        | $          | 267        |       | 35       | %          | $          | 100        |   | 35 | % |
| Increase  (decrease) in income taxes resulting from: |       |     |       |       |       |     |       |       |       |     |       |       |       |
| Effect of bank  owned life insurance                 |       | (111     | )          | (3         | )%         | (185     | )          | (2         | )%         | (91      | )          | (32        | )%         |
| Municipal  interest income                           |       | (98      | )          | (3         | )%         | —   |       |       |       | —   |       |       |       |
| Non-deductible  expense                              |       | 74       |       | 2          | %          | —   |       |       |       | —   |       |       |       |
| Other                                                |       | (5       | )          |       |       | (82      | )          | (1)        | %          | (9       | )          | (3         | )%         |
|                                                 |       | $        | 1,075      |       |       |     | $          | —     |       |     |       | $          | —     |   |   |   |

 

**NOTE 10 – SUBORDINATED DEBENTURES**

The Bank HoldingsStatutory Trust I, a Connecticut statutory trust (the “Trust”) was formed bythe Company for the sole purpose of issuing trust preferred securities fullyand unconditionally guaranteed by the Company.  For financial reporting purposes, the Trust is not consolidated and theFloating Rate Subordinated Deferrable Interest Debentures (the “SubordinatedDebentures”) held by the Trust, issued and guaranteed by the Company arereflected in the Company’s consolidated balance sheet in accordance withprovisions of FIN 46R.  Under applicableregulatory guidance, the amount of trust preferred securities eligible forinclusion in Tier 1 capital is limited to twenty-five percent (25%) of theCompany’s Tier 1 capital on a pro-forma basis. At December 31, 2006, $10.3 million of trust preferred securitiesqualified as Tier 1 capital, with another $10.3 million

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qualifying as Tier 2capital.

During the fourth quarterof 2005, the Trust issued $15 million Floating Rate Capital Trust Pass-throughSecurities (“TRUPS”) with a liquidation value of $1,000 per security for grossproceeds of $15 million.  The entireproceeds of the issuance were invested by the Trust in $15,464,000 ofsubordinated Debentures issued by the Company, with identical maturity,repricing and payment terms as the TRUPS. These Subordinated Debentures represent the sole assets of the Trust.  The Subordinated Debentures issued by theTrust matures on December 15, 2035, bear a current interest rate of 90 dayLIBOR plus 1.42% with repricing and payments due quarterly.  These Subordinated Debentures are redeemableby the Company, subject to receipt by the Company of prior approval from theFederal Reserve Bank, on any December 15 on or after December 15, 2010.  The redemption price is par plus accrued andunpaid interest, except in the case of redemption under a special event whichis defined in the debenture.  The TRUPSare subject to mandatory redemption to the extent of any early redemption ofthe related Subordinated Debentures and upon maturity of those SubordinatedDebentures on December 15, 2035.

Holders of the TRUPS areentitled to a cumulative cash distribution on the liquidation amount of $1,000per security at an interest rate at December 31, 2006 of 6.87%.  For each successive three month periodbeginning on December 15 of each year, the rate will be adjusted to equal the 3month LIBOR plus 1.42%, provided, however, that such annual rate does not exceed11%.  The Trust has the option to deferpayment of the distributions for a period of up to five years, as long as theCompany is not in default on the payment of interest on the SubordinatedDebentures.  The TRUPS issued in theoffering were sold in private transactions pursuant to an exemption fromregistration under the Securities Act of 1933, as amended.  The Company has guaranteed, on a subordinatedbasis, distributions and other payments due on the TRUPS.

Asa result of the purchase and merger agreement with NNB Holdings, Inc. theCompany acquired NNB Holdings Statutory Trust I which was formed in June 2005to issue $5,155,000 of fixed/floating rate Cumulative Trust PreferredSecurities, which are classified as junior subordinated debt.  The fixed rate of 5.95% began on the date ofissuance and will end on (but not including) the interest payment date in June2010, at which time the interest rate switches to a floating interest rateequal to the three month LIBOR plus 1.85%. The acquired debentures will mature in 2035, but may be redeemed by theCompany at its option at any time on or after June 15, 2010 with a payment of apremium as outlined in the indenture agreement.

**NOTE 11 – COMMITMENTS ANDCONTINGENCIES**

***FinancialInstruments with Off-balance Sheet Risk***

The Company is party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments may includecommitments to extend credit and standby letters of credit.  Such commitments may involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the consolidated balance sheets.

The Company’s exposure tocredit loss, in the event of nonperformance by the other parties to thefinancial instrument, is represented by the contractual amount of theseinstruments.  The Company follows thesame credit policies in making commitments as it does for on-balance-sheetinstruments.  A summary of the contractamount of the company’s exposure to off-balance sheet risk as of December 31 isas follows:
|                                        | ** ** | **Contract Amount**             | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)** | ** ** |
|                                   |       |                                 |       |   |   |
| Commitments to  extend credit:         |       |                                 |       |   |   |
| Secured                                |       | $                                    | 79,467     |   | $ | 52,153 |   |
| Unsecured                              |       | 25,823                               |       | 18,160 |   |
| Unsecured  consumer lines of credit    |       | 1,650                                |       | 1,163 |   |
| Standby letters  of credit (Unsecured) |       | 545                                  |       | 293 |   |
|                                   |       | $                                    | 107,485    |   | $ | 71,769 |   |

 

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Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. Since many of the commitments are expected to expire without ever beingdrawn upon, the total commitment amounts do not necessarily represent futurecash requirements.  The Company evaluateseach customer’s creditworthiness on a case-by-case basis. The amount ofcollateral obtained, if deemed necessary by the Company, is based on management’scredit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory,property and equipment, residential real estate and income producing commercialproperties.

Unfunded commitmentsunder commercial lines-of-credit, revolving credit lines and overdraftprotection agreements are commitments for possible extension of credit toexisting customers.  Theselines-of-credit may be uncollateralized, may not contain a specified maturitydate and may not be drawn upon to the total extent to which the Company iscommitted.

Standby letters-of-creditare conditional lending commitments issued by the Company to guarantee theperformance of a customer to a third party. Those letters-of-credit are primarily issued to support public and privateborrowing arrangements.  Essentially allletters of credit have expiration dates within one year.

As of December 31, 2006there were commitment fee obligations of less than $1 thousand, for the$545,000 Standby Letters of Credit. The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending facilities tocustomers, and management believes that no undue credit or service fee incomeexposure exists as a result of such transaction.

In connection withstandby letters of credit, the Bank recognizes the related commitment feereceived from the third party as a liability at the inception of the guaranteepursuant to FASB Interpretation 45 (FIN 45) *Initial Recognition and Measurement of theLiability for a Guarantor’s Obligations*. Commitment feeswhere the likelihood of exercise of the commitment is remote are generallyrecognized as service fee income over the commitment period.

***Concentrations***

The Company makescommercial, commercial real estate, and residential real estate loans innorthern Nevada and northern California. The Company makes consumer loans to customers primarily in northernNevada.  At December 31, 2006 and 2005,real estate loans accounted for approximately 79% and 75%, respectively, oftotal loans.  Substantially all of theseloans are secured by first liens with an initial loan to value ratio ofgenerally not more than 75%.  The Company’spolicy for requiring collateral is to obtain collateral whenever it isavailable or desirable; depending upon the degree of risk the Company iswilling to take.  In addition,approximately 5% of total loans are unsecured. The Company’s loans are expected to be repaid from cash flow or fromproceeds from the sale of selected assets of the borrowers.

A substantial portion ofthe Company’s customers’ ability to honor their contracts is dependent on theeconomy in the areas the Company serves. The Company’s goal is to maintain a diversified loan portfolio whichrequires the loans to be well collateralized and supported by cash flows.

***LegalContingencies***

Withthe exception of the matters disclosed below, in the normal course of business,the Company is involved in various legal proceedings.  In the opinion of management, any liabilityresulting from such proceedings would not have a material adverse effect on theCompany’s financial condition or results of operation.

InNovember, 2004, Dot1Web, Inc., Thomas R. Creal, court appointed receiver forDot1Web, Inc. and Robert DeMaio filed an action against Nevada Security Bank,the Company’s subsidiary.  The BankHoldings is not a party to this lawsuit. The central allegation against the Bank is the alleged wrongful dishonorof certain checks drawn on the account of Plaintiff.  The Plaintiffs alleged that, as a result ofthe dishonor, they lost potential investors who were planning on assisting themwith $20,000,000 in capital investment and Mr. Demaio also

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personallylost nearly $80,000,000 in the value of stock he held in Dot1Web, Inc.

OnMarch 10, 2006, in the Second Judicial District Court of the State of Nevada,in and for the County of Washoe, an order was issued dismissing the plaintiff’scomplaint with prejudice.

***ExecutiveAgreements***

The Company has enteredinto agreement with six executives, which state that in the event the Companyterminates the employment of these officers without cause, or upon change incontrol of the Company, the Company may be liable for the officers’ salaries asoutlined in the agreements.

**NOTE 12 – REGULATORY CAPITALREQUIREMENTS**

The Company (on aconsolidated basis) and the Bank are subject to various regulatory capitalrequirements administered by the federal banking agencies.  Failure to meet minimum capital requirementscan initiate certain mandatory and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effect on theCompany’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, the Company and the Bank must meet certain specificcapital guidelines that involve quantitative measures of their assets,liabilities and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The capitalamounts and classifications are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.  Prompt corrective action provisions are notapplicable to bank holding companies.

Additionally, State ofNevada bank regulations restrict distribution of the net assets of the Bank dueto the fact that such regulations require the sum of the Bank’s stockholders’equity and allowance for loan losses to be at least 6% of the average of theBank’s total daily deposit liabilities for the preceding 60 days.  As a result of these regulations, approximately$29.3 million and $18.2 million of the Bank’s stockholders’ equity wererestricted at December 31, 2006 and 2005 respectively.  In addition, as a result of the Bank’saccumulated deficit through year end 2005, the Bank was restricted from payingcash dividends.

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company andthe Bank to maintain minimum amounts and ratios (set forth in the followingtable) of total and Tier 1 capital (as defined in the regulations) to risk-weightedassets (as defined) and of Tier 1 capital (as defined) to average assets (asdefined).  Management believes, as ofDecember 31, 2006 and 2005, that the Company and Bank met all capital adequacyrequirements to which they were subject.

As of December 31, 2006,the most recent notification from the Federal Deposit Insurance Companycategorized the Bank as well capitalized under the regulatory framework forprompt correct action.  To be categorizedas well capitalized, an institution must maintain certain minimum totalrisk-based, Tier 1 risk-based and Tier 1 leverage ratios.

The Company’s and theBank’s capital amounts and ratios as of December 31, 2006 and 2005, as well asregulatory minimums, are presented in the table below:
|                                        | ** ** | **Actual** | ** ** | **Minimum Capital  Requirement** | ** ** | **Minimum to be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|----------------------------------------|------------|------------|------------|---------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| **(Dollars in thousands)**   | ** ** | **Amount** | ** ** | **Ratio**                             | ** ** | **Amount**                                                                                                    | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                   |       |       |       |                                  |       |                                                                                                          |       |   |   |   |   |   |   |
| **December 31, 2006**                  |       |       |       |                                  |       |                                                                                                          |       |   |   |   |   |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |                                  |       |                                                                                                          |       |   |   |   |   |   |   |
| The Bank Holdings                      |       | $          | 67,001     |                                  | 12.98      | %                                                                                                             | $          | 41,527 |   | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 53,084     |                                  | 10.74      | %                                                                                                             | $          | 39,545 |   | 8.00 | % | $ | 49,431 |   | 10.00 | % |
|                                   |       |       |       |                                  |       |                                                                                                          |       |   |   |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |                                  |       |                                                                                                          |       |   |   |   |   |   |   |
| The Bank Holdings                      |       | $          | 51,431     |                                  | 9.97       | %                                                                                                             | $          | 20,763 |   | 4.00 | % | NA |   | NA |   |
|                                        |            |            |            |                                       |            |                                                                                                               |            |  |  |  |  |  |  |  |  |  |

 

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| Nevada Security Bank                   |   | $      | 47,310 |   | 9.57   | %      | $      | 17,372 |   | 4.00   | %      | $      | 29,659 |   | 6.00   | % |
|----------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---|
|                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Capital to Average Assets       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $      | 51,431 |   | 9.85   | %      | $      | 22,221 |   | 4.00   | %      | NA     |   | NA     |   |
| Nevada Security Bank                   |   | $      | 47,310 |   | 8.04   | %      | $      | 19,973 |   | 4.00   | %      | $      | 26,240 |   | 5.00   | % |
|                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **December 31, 2005**                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Capital to Risk Weighted Assets  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $      | 46,183 |   | 16.53  | %      | $      | 22,345 |   | 8.00   | %      | NA     |   | NA     |   |
| Nevada Security Bank                   |   | $      | 32,883 |   | 12.51  | %      | $      | 21,026 |   | 8.00   | %      | $      | 26,282 |   | 10.00  | % |
|                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $      | 37,557 |   | 13.45  | %      | $      | 11,172 |   | 4.00   | %      | NA     |   | NA     |   |
| Nevada Security Bank                   |   | $      | 30,003 |   | 11.42  | %      | $      | 10,513 |   | 4.00   | %      | $      | 15,769 |   | 6.00   | % |
|                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 Capital to Average Assets       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $      | 37,557 |   | 10.06  | %      | $      | 14,929 |   | 4.00   | %      | NA     |   | NA     |   |
| Nevada Security  Bank                  |   | $      | 30,003 |   | 8.96   | %      | $      | 13,400 |   | 4.00   | %      | $      | 16,750 |   | 5.00   | % |

 

**NOTE 13 –EMPLOYEE BENEFIT PLANS**

The Company has aqualified 401(k) benefit plan for all eligible employees.  Participants are able to defer up to 15% oftheir compensation subject to certain limits based on federal tax laws. Theplan also provides a profit sharing component where the Company can makediscretionary contributions to the plan, which is allocated based on thecompensation of eligible employees.  Acontribution up to a maximum of $500 was made per participant by the Companyduring 2006 amounting to approximately $30,000, whereas no contributions weremade during the years ended December 31, 2005, or 2004.

**NOTE 14 –STOCK COMPENSATION PLAN**

***StockCompensation Plan***

The Company has adoptedthe 2002 Stock Option Plan (the “Plan”) under which options to acquire commonstock of the Company may be granted to employees, officers, directors andothers at the discretion of the Board of Directors.  The Plan allows for the granting of incentiveand non-qualifying stock options as those terms are defined in the InternalRevenue Code.  The Plan, as amended atthe shareholder’s 2004 Annual Meeting, authorizes up to 1,162,357 shares ofcommon stock to be provided by shares authorized but not outstanding.  Under the terms of the plan authorized sharesapproximate 20% of outstanding shares of the Company.  The Plan provides for the exercise price andterm of each option to be determined by the Board at the date of grant,provided that no options shall have a term greater than 10 years.  All stock options granted under the planexpire ten years after the date of grant.

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A summary of stock optionactivity for the year ended December 31, 2006 is as follows:

|                                    | ** ** | **December 31, 2006**     | ** ** |
|------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **Number of  Shares (1)** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** |
|                               |       |                                |       |   |   |   |   |   |   |
| Outstanding at beginning of year   |       | 542,124                             |       | $ | 12.22 |   |   |   |   |   |
| Granted                            |       | 99,225                              |       | 17.37 |   |   |   |   |   |
| NNB Replacement shares granted (2) |       | 20,004                              |       | 6.75 |   |   |   |   |   |
| Exercised                          |       | 1,124                               |       | 9.22 |   |   |   |   |   |
| Forfeited                          |       | 294                                 |       | 17.33 |   |   |   |   |   |
| Outstanding at end of year         |       | 659,935                             |       | $ | 12.83 |   | $ | 3,476,582 |   | 7.21 |   |
|                               |       |                                |       |   |   |   |   |   |   |
| Options exercisable at year-end    |       | 448,817                             |       | $ | 11.57 |   | $ | 2,931,386 |   | 6.77 |   |
|                               |       |                                |       |   |   |   |   |   |   |
| Weighted average  remaining life   |       | 7.21 Years                          |       |   |   |   |   |   |   |

 

----

(1)          For the year endedDecember 31, 2006 shares have been adjusted for the 5% Stock Dividend declaredon February 15, 2007, paid on March 1, 2007.

(2)          For the year endedDecember 31, 2006, certain director’s and officer’s shares granted by NNBHoldings, Inc. were exchanged for Company options.
| ** **                                                       | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Weighted average grant-date  fair value of stock options granted |       | $         | 5.44       |      | $          | 6.86      |       | $ | 7.66 |   |
| Total fair value of  stock options vested                        |       | 2,931,386 |       | 2,313,841 |       | 1,566,244 |       |
| Total intrinsic value  of stock options exercised                |       | $         | 8,239      |      | $          | 17,989    |       | $ | 125,024 |   |

 

For the years ended December31, 2006 and 2005 the Company recognized $416,000 and $85,000, respectively,for stock option compensation expense. The tax benefit of the compensation expense is $108,000 for 2006 and$31,000 for 2005.  As of December 31,2006 there was $454,000 in unrecognized compensation expense related tonon-vested stock options. This unrecognized compensation cost has a weightedaverage life of about 4 years.

All options granted underthe plan, except for founder’s options (9,000 non-qualified options) and optionsto two individuals which were carried over from the NNB Holdings, Inc. plan(18,899) which were immediately exercisable, have been granted with a five yearvesting period.  Twenty percent of suchoptions are immediately exercisable, with the remaining 80% exercisable at 20%per year, over each of the next four anniversary dates of the grant.

On December 28, 2005, theDirectors of The Bank Holdings approved the acceleration of non-qualified stockoptions granted under The Bank Holdings Stock Option Plan of 2002 asamended.  Non-qualified optionspreviously granted under this Plan were to be vested over a five year term.

As stated previously, theCompany has adopted FAS 123(R) using the modified-prospective-transitionmethod; as such, the results for prior periods have not been restated.  The following table illustrates the effect onnet income and earnings per share as if the Company had applied the fair valuerecognition provisions of FAS 148, *Accounting for Stock-BasedCompensation – Transition and Disclosure,* an amendment of FAS 123.

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|                                                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                                                                                       | ** ** | **(Dollars in thousands)**        | ** ** |
| Net  Income/(Loss):                                                                                              |       |                                        |       |   |   |
| As reported                                                                                                      |       | $                                           | 1,412      |   | $ | 281 |   |
| Add: Stock-based employee compensation expense  included in reported net income                                  |       | 85                                          |       | 83 |   |
| Deduct: Total Stock-based employee compensation  expense determined under fair value based method for all awards |       | 1,518                                       |       | 723 |   |
|                                                                                                             |       |                                        |       |   |   |
| Pro-forma net  (loss)                                                                                            |       | $                                           | (21        | ) | $ | (359 | ) |
|                                                                                                             |       |                                        |       |   |   |
| Basic and  diluted (loss) per share                                                                              |       |                                        |       |   |   |
| As reported basic                                                                                                |       | $                                           | .45        |   | $ | 0.10 |   |
| As reported diluted                                                                                              |       | $                                           | .41        |   | $ | 0.09 |   |
| Pro forma basic                                                                                                  |       | $                                           | (.01       | ) | $ | (0.12 | ) |
| Pro forma  diluted                                                                                               |       | $                                           | (.01       | ) | $ | (0.12 | ) |

 

**NOTE 15 –RELATED PARTY TRANSACTIONS**

In the ordinary course ofbusiness, the Company has had, and may be expected to have in the future,banking transactions with directors, significant stockholders, principalofficers, their immediate families and affiliated companies in which they areprincipal stockholders (commonly referred to as related parties).  In management’s opinion, these loan anddeposit transactions were on the same terms as those for comparable loan anddeposit transactions with non-related parties.
|                                              | ** ** | **For the Years Ended December, 31** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------|------------|
| ***Loan Transactions***                 | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)**                          | ** ** |
| **Balance,  Beginning**                      |       | $                                                             | 6,185      |   | $ | 6,004 |   |
| New loans                                    |       | 12,383                                                        |       | 7,136 |   |
| Repayments                                   |       | (7,364                                                        | )          | (6,955 | ) |
| **Balance,  Ending**                         |       | $                                                             | 11,204     |   | $ | 6,185 |   |
|                                         |       |                                                          |       |   |   |
| Undisbursed  commitments to related parties, |       | $                                                             | 5,902      |   | $ | 5,452 |   |
|                                         |       |                                                          |       |   |   |
| Deposit balances of  related parties         |       | $                                                             | 12,495     |   | $ | 5,968 |   |

 

**NOTE 16 –FAIR VALUE OF FINANCIAL INSTRUMENTS**

Financial AccountingStandards Board (FASB) Statement No. 107, *Disclosures About FairValue of Financial Instruments,* requires disclosure of fair valueinformation about financial instruments, whether or not recognized in thebalance sheets, for which it is practicable to estimate that value.

Management uses its bestjudgment in estimating the fair value of the Company’s financial instruments;however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financialinstruments, the fair value estimates presented herein are not necessarilyindicative of the amounts the Company could have realized in a salestransaction at December 31, 2006 or 2005. The estimated fair value

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amounts have beenmeasured as of year end, and have not been reevaluated or updated for purposesof these financial statements subsequent to these dates.  As such, the estimated fair values of thesefinancial instruments subsequent to the reporting dates may be different thanthe amounts reported at year-end.

The information shouldnot be interpreted as an estimate of the fair value of the entire Company sincea fair value calculation is only required for a limited portion of the Company’sassets, and due to the wide range of valuation techniques and the degree ofsubjectivity used in making the estimate, comparisons between the Company’sdisclosures and those of other companies or banks may not be meaningful.  The following methods and assumptions wereused by the Company in estimating fair value disclosures for financialinstruments.

***Cash and cash equivalents***

The carrying amounts ofcash, due from banks, liquid money market funds, and federal funds soldapproximate fair value.

***Securities held to maturity and available for sale***

Fair values forsecurities are based on quoted market prices, where available.  If quoted market prices are not available,fair values are based on quoted market prices of comparable instruments.

***Trading Securities***

Fair values for tradingequity securities are based on quoted market prices.

***Non-marketable Securities***

The reported amount ofFederal Home Loan Bank (FHLB) stock equals its fair value due to the fact thatthe shares can only be redeemed by the FHLB at the $100 per share value.  No ready market exists for the Pacific CoastBankers’ Bancshares stock and it has no quoted market value.  The Company’s other debt and equityinvestments including Carson River Community Bank are reported at book valuewhich equals its fair value due to the fact that these items have no quotedmarket value.

***Loans***

For variable-rate loansthat reprice frequently and with no significant change in credit risk, fairvalues are based on carrying values.  Thefair values for all other loans are estimated using discounted cash flowanalyses, using interest rates currently being offered for loans with similarterms to borrowers with similar credit quality.

***Deposit liabilities***

The fair values disclosedfor deposits with no defined maturities are equal to their carrying amountswhich represent the amount payable on demand. The carrying amounts for variable-rate, fixed-term money market accountsand certificates of deposit approximate their fair value at the reportingdate.  Fair values for fixed-ratecertificates of deposit are estimated using a discounted cash flow calculationthat applies interest rates currently being offered on certificates to aschedule of aggregated expected monthly maturities on time deposits.

***Other borrowed funds***

The carrying amount ofFHLB advances approximate fair value due to the next day maturity.  The carrying value of subordinated debenturespayable approximate fair value because they reprice quarterly.  The Company’s notes payable approximate fairvalue as they are tied to prime.  TheFHLB term advances are estimated using discounted cash flow analyses, usinginterest rate currently being offered for advances with similar terms toborrowers with similar credit quality.

***Junior Subordinated Debt***

The carrying amount ofthe junior subordinated debt approximate fair value due to the interest ratesreprice quarterly.

***Accrued interest receivable and payable***

The carrying amounts ofaccrued interest receivable and payable approximate fair value.

100

----

***Off-balance sheet instruments***

Fair values for theCompany’s off-balance sheet lending commitments (commitments to extend credit)are based on fees currently charged to enter into similar agreements, takinginto account the remaining terms of the agreements and the counterparties’credit standing. As of December 31, 2006 and 2005, loan commitments on whichthe committed fixed interest rate is less than the current market rate areinsignificant.

The estimated fairvalues, and related carrying amounts, of the Company’s financial instrumentsare as follows:
|                               | ** ** | **December 31,**   | ** ** |
|-------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **Carrying  Amount**    | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                    | ** ** | **(in thousands)** | ** ** |
| Financial  Assets:            |       |                    |       |   |   |   |   |   |   |
| Cash and due from banks       |       | $                       | 31,351     |   | $ | 31,351 |   | $ | 5,980 |   | $ | 5,980 |   |
| Federal funds sold            |       | 535                     |       | 535 |   | 27,040 |   | 27,040 |   |
| Liquid money market funds     |       | 1,337                   |       | 1,337 |   | 8,500 |   | 8,500 |   |
| Securities available-for-sale |       | 16,337                  |       | 16,337 |   | 19,512 |   | 19,512 |   |
| Securities held-to-maturity   |       | 76,590                  |       | 75,817 |   | 64,309 |   | 63,048 |   |
| Trading Securities            |       | 4,299                   |       | 4,299 |   | 1,283 |   | 1,283 |   |
| Other equity securities       |       | 4,750                   |       | 4,750 |   | 2,067 |   | 2,067 |   |
| Loans, net                    |       | 457,431                 |       | 456,014 |   | 245,185 |   | 239,406 |   |
| Accrued interest receivable   |       | 3,179                   |       | 3,179 |   | 1,696 |   | 1,696 |   |
|                          |       |                    |       |   |   |   |   |   |   |
| Financial  Liabilities:       |       |                    |       |   |   |   |   |   |   |
| Deposits                      |       | 496,997                 |       | 495,294 |   | 338,198 |   | 338,924 |   |
| Other borrowed funds          |       | 39,530                  |       | 39,530 |   | — |   | — |   |
| Junior Subordinated debt      |       | 20,619                  |       | 20,619 |   | 15,464 |   | 15,464 |   |
| Accrued interest  payable     |       | 1,507                   |       | 1,507 |   | 710 |   | 710 |   |
|                               |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

**NOTE 17 – SEGMENT INFORMATION**

SFAS No. 131, *Financial Reporting for Segments of a Business Enterprise*,requires that a public business enterprise report financial and descriptiveinformation about is reportable operating segments.  According to the statement, operatingsegments are defined as components of an enterprise about which separatefinancial information is available that is evaluated regularly by the chiefoperating decision makers in deciding how to allocate resources and inassessing performance.

The Company evaluatessegment performance internally based on the bank charter, the 1031 QI operatingdivision, and “other”.  The operatingsegment defined as “other” includes the Parent company, and eliminations oftransactions between segments.

The accounting policiesof the individual operating segments are the same as those of the Company, asdescribed in Note 1.  Transactionsbetween operating segments are conducted at fair value, resulting in profitsthat are eliminated for reporting consolidated results of operations.

There is no segmentreporting for 2005, since there only existed the Bank and Parent at December31, 2005 and there was no separately evaluated information concerningallocation of resources or assessment of performance.

101

----

 
| ** **                                                             | ** ** | **The Bank Holdings  Segment Information** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                             | ** ** | ** **                                                | ** ** | **1031** | ** ** | ** ** | ** ** | **Inter-  Company** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Bank**                                                  | ** ** | **Division *** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the Year ended December 31, 2006** |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net interest  income                                                   |       | $                                                         | 15,939     |   | $ | 1,521 |   | $ | (366 | ) | $ | (1,138 | ) | $ | 15,956 |   |
| Provision for  loan losses                                             |       | 771                                                       |       | — |   | — |   | — |   | 771 |   |
| Net interest  income after provision                                   |       | 15,168                                                    |       | 1,521 |   | (365 | ) | (1,138 | ) | 15,185 |   |
|                                                                   |       |                                                      |       |   |   |   |   |   |   |   |   |
| Non-interest  income                                                   |       |                                                      |       |   |   |   |   |   |   |   |   |
| Service Charges  on deposit accounts                                   |       | 261                                                       |       | — |   | — |   | — |   | 261 |   |
| Other service  charges and fees                                        |       | 190                                                       |       | — |   | — |   | — |   | 190 |   |
| Bank owned life  insurance                                             |       | 307                                                       |       | — |   | — |   | — |   | 307 |   |
| Exchange fee  income                                                   |       | —                                                    |       | 448 |   | — |   | — |   | 448 |   |
| Unrealized gain  on trading securities                                 |       | —                                                    |       | — |   | 443 |   | — |   | 443 |   |
| Other income                                                           |       | 2                                                         |       | — |   | 31 |   | — |   | 33 |   |
| Total  non-interest income                                             |       | 760                                                       |       | 448 |   | 474 |   | — |   | 1,682 |   |
|                                                                   |       |                                                      |       |   |   |   |   |   |   |   |   |
| Non-interest  expense                                                  |       |                                                      |       |   |   |   |   |   |   |   |   |
| Salaries and  benefits                                                 |       | 5,976                                                     |       | 725 |   | 916 |   | — |   | 7,617 |   |
| Occupancy                                                              |       | 1,643                                                     |       | 114 |   | 164 |   | — |   | 1,921 |   |
| Marketing                                                              |       | 365                                                       |       | 115 |   | 47 |   | — |   | 527 |   |
| Data Processing                                                        |       | 856                                                       |       | 82 |   | 22 |   | — |   | 960 |   |
| Deposit and loan  servicing costs                                      |       | 604                                                       |       | — |   | — |   | — |   | 604 |   |
| Accounting and  legal                                                  |       | 131                                                       |       | 16 |   | 224 |   | — |   | 371 |   |
| Other  professional services                                           |       | 123                                                       |       | 35 |   | 41 |   | — |   | 199 |   |
| Telephone and data  communications                                     |       | 195                                                       |       | 18 |   | 92 |   | — |   | 305 |   |
| Other expenses                                                         |       | 780                                                       |       | 129 |   | 169 |   | — |   | 1,078 |   |
| Total  non-interest expenses                                           |       | 10,673                                                    |       | 1,234 |   | 1,675 |   | — |   | 13,582 |   |
|                                                                   |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net income  (loss) before taxes and other                              |       | 5,255                                                     |       | 736 |   | (1,567 | ) | (1,138 | ) | 3,285 |   |
|                                                                   |       |                                                      |       |   |   |   |   |   |   |   |   |
| Attributable to  minority shareholders                                 |       | —                                                    |       | 127 |   | — |   | — |   | 127 |   |
| Income tax  provision (benefit)                                        |       | 1,338                                                     |       | 315 |   | (578 | ) | — |   | 1,075 |   |
|                                                                   |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net Income (loss)                                                      |       | $                                                         | 3,917      |   | $ | 294 |   | $ | (989 | ) | $ | (1,138 | ) | $ | 2,083 |   |

 

----

*  1031 division is only 8 months of averagedata.
| **Average Balance Sheet** |   |    |    |   |   |   |   |    |   |    |   |
|-------------------------------------|--------|---------|---------|--------|--------|--------|--------|---------|--------|---------|--------|
| Assets                              |   | $       | 413,609 |   | $      | 8,478  |   | $       | 30,092 |    |   |   | $ | 452,179 |   |
| Securities                          |   | 88,427  |    | — |   | 3,309  |   |    |   | 91,736  |   |
| Loans                               |   | 308,411 |    | — |   | — |   |    |   | 308,411 |   |
| Deposits                            |   | 351,956 |    | 48,981 |   |   |   | (41,005 | )      | 359,932 |   |
| Borrowing                           |   | 27,750  |    | — |   | 16,737 |   |    |   | 42,296  |   |
|                                     |        |         |         |        |        |        |        |         |        |         |        |  |  |  |  |

 

102

----

 
| ** **                                                                | ** ** | **The Bank Holdings  Segment Information** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                | ** ** | ** **                                                | ** ** | **1031** | ** ** | ** ** | ** ** | **Inter-  Company** | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | **Bank**                                                  | ** ** | **Division** | ** ** | **Parent** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **For the Quarter ended December 31, 2006** |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net interest  income                                                      |       | $                                                         | 5,197      |   | $ | 1,499 |   | $ | (242 | ) | $ | (1,138 | ) | $ | 5,316 |   |
| Provision for  loan losses                                                |       | 175                                                       |       | — |   | — |   | — |   | 175 |   |
| Net interest  income after provision                                      |       | 5,022                                                     |       | 1,499 |   | (242 | ) | (1,138 | ) | 5,141 |   |
|                                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Non-interest  income                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Service Charges  on deposit accounts                                      |       | 97                                                        |       | — |   | — |   | — |   | 97 |   |
| Other service  charges and fees                                           |       | 76                                                        |       | — |   | — |   | — |   | 76 |   |
| Bank owned life  insurance                                                |       | 113                                                       |       | — |   | — |   | — |   | 113 |   |
| Exchange fee  income                                                      |       | —                                                    |       | 159 |   | — |   | — |   | 159 |   |
| Unrealized gain  on trading securities                                    |       | —                                                    |       | — |   | 212 |   | — |   | 212 |   |
| Other income                                                              |       | —                                                    |       | — |   | 20 |   | — |   | 20 |   |
| Total  non-interest income                                                |       | 286                                                       |       | 159 |   | 232 |   | — |   | 677 |   |
|                                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Non-interest  expense                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| Salaries and  benefits                                                    |       | 1,855                                                     |       | 234 |   | 300 |   | — |   | 2,389 |   |
| Occupancy                                                                 |       | 451                                                       |       | 40 |   | 42 |   | — |   | 533 |   |
| Marketing                                                                 |       | 90                                                        |       | 74 |   | 24 |   | — |   | 188 |   |
| Data Processing                                                           |       | 306                                                       |       | 10 |   | 10 |   | — |   | 326 |   |
| Deposit and loan  servicing costs                                         |       | 293                                                       |       | — |   | — |   | — |   | 293 |   |
| Accounting and  legal                                                     |       | (67                                                       | )          | 6 |   | 35 |   | — |   | (26 | ) |
| Other  professional services                                              |       | (161                                                      | )          | 34 |   | 41 |   | — |   | (86 | ) |
| Telephone and  data communications                                        |       | 59                                                        |       | 5 |   | 1 |   | — |   | 65 |   |
| Other expenses                                                            |       | 378                                                       |       | 25 |   | 17 |   | — |   | 420 |   |
| Total  non-interest expenses                                              |       | 3,204                                                     |       | 428 |   | 470 |   | — |   | 4,102 |   |
|                                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net income (loss)  before taxes and other                                 |       | 2,104                                                     |       | 1,230 |   | (480 | ) | (1,138 | ) | 1,716 |   |
|                                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Attributable to  minority shareholders                                    |       | —                                                    |       | 159 |   | — |   | — |   | 159 |   |
| Income tax  provision (benefit)                                           |       | 417                                                       |       | 389 |   | (153 | ) | — |   | 653 |   |
|                                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net Income  (loss)                                                        |       | $                                                         | 1,687      |   | $ | 682 |   | $ | (327 | ) | $ | (1,138 | ) | $ | 904 |   |
|                                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| **Average Balance Sheet**                                                 |       |                                                      |       |   |   |   |   |   |   |   |   |
| Assets                                                                    |       | $                                                         | 496,904    |   | $ | 8,882 |   | $ | 49,735 |   |   |   | $ | 555,521 |   |
| Securities                                                                |       | 90,424                                                    |       | — |   | 5,035 |   |   |   | 95,459 |   |
| Loans                                                                     |       | 387,432                                                   |       | — |   | — |   |   |   | 387,432 |   |
| Deposits                                                                  |       | 409,860                                                   |       | 49,406 |   |   |   | (41,548 | ) | 417,718 |   |
| Borrowing                                                                 |       | 45,000                                                    |       | — |   | 18,553 |   |   |   | 63,553 |   |
|                                                                      |       |                                                      |       |   |   |   |   |   |   |   |   |

 

103

----

**NOTE 18 - CONDENSED FINANCIALSTATEMENTS OF PARENT COMPANY**

**Financial Information Pertaining only to The Bank Holdings is as follows:**

**Balance sheets**
| ** **                                     | ** ** | **December 31,**   | ** ** |
|------------------------------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(in thousands)** | ** ** |
| **ASSETS**                                     |       |                    |       |   |   |
| Cash and due  from banks                       |       | $                       | 3,696      |   | $ | 309 |   |
| Liquid Money  Market Funds                     |       | 1,377                   |       | 9,251 |   |
| Cash and Cash  Equivalents                     |       | 5,073                   |       | 9,560 |   |
| Securities  available for sale                 |       | 5,359                   |       | 2,075 |   |
| Securities  trading                            |       | 4,299                   |       | 1,283 |   |
| Other equity  investments                      |       | 500                     |       |   |   |
| Investment in  Nevada Security Bank            |       | 68,339                  |       | 30,662 |   |
| Investment in  non-bank subsidiaries           |       | 1,844                   |       | 464 |   |
| Premises and  equipment, net                   |       | 165                     |       | 179 |   |
| Goodwill                                       |       | 9,304                   |       |   |   |
| Other assets                                   |       | 1,821                   |       | 343 |   |
| **TOTAL ASSETS**                               |       | $                       | 96,703     |   | $ | 44,566 |   |
|                                           |       |                    |       |   |   |
| **LIABILITIES AND STOCKHOLDERS'  EQUITY**      |       |                    |       |   |   |
|                                           |       |                    |       |   |   |
| Notes Payable                                  |       | $                       | 530        |   | $ | — |   |
| Subordinated debentures                        |       | 20,619                  |       | 15,464 |   |
| Minority shareholder  interest in subsidiaries |       | 1,425                   |       |   |   |
| Accrued expenses and  other liabilities        |       | 561                     |       | 400 |   |
| Total  Liabilities                             |       | 23,135                  |       | 15,864 |   |
|                                           |       |                    |       |   |   |
| Stockholders' equity:                          |       |                    |       |   |   |
| Total  stockholders' equity                    |       | 73,568                  |       | 28,702 |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY** |       | $                       | 96,703     |   | $ | 44,566 |   |

 

104

----

**Statement of Income**
| ** **                                              | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                     | ** ** |
| **Interest income:**                                    |       |                                        |       |   |   |   |   |
| Liquid  Investments                                     |       | $                                           | 328        |   | $ | 88 |   | $ | 4 |   |
| Securities,  taxable                                    |       | 248                                         |       | 59 |   | 30 |   |
| Dividends                                               |       | 125                                         |       | 17 |   | 6 |   |
| **Total interest and dividend  income**                 |       | 701                                         |       | 164 |   | 40 |   |
|                                                    |       |                                        |       |   |   |   |   |
| **Interest expense:**                                   |       |                                        |       |   |   |   |   |
| Notes Payable                                           |       | 37                                          |       | — |   | — |   |
| Subordinated  debentures                                |       | 1,031                                       |       | 142 |   | 58 |   |
| **Total interest expense**                              |       | 1,068                                       |       | 142 |   | 58 |   |
|                                                    |       |                                        |       |   |   |   |   |
| **Net interest income**                                 |       | (367                                        | )          | 22 |   | (18 | ) |
|                                                    |       |                                        |       |   |   |   |   |
| **Non-interest income:**                                |       |                                        |       |   |   |   |   |
| Unrealized gain  on trading securities                  |       | 443                                         |       | 47 |   | 110 |   |
| Net gain on sale  of investment securities              |       | 31                                          |       | 12 |   | (12 | ) |
| **Total non-interest income**                           |       | 474                                         |       | 59 |   | 98 |   |
| ** **                                              |       |                                        |       |   |   |   |   |
| **Non-interest expense:**                               |       |                                        |       |   |   |   |   |
| Salaries and  employee benefits                         |       | 915                                         |       | 321 |   | 239 |   |
| Occupancy and  equipment                                |       | 164                                         |       | 180 |   | 86 |   |
| Data processing                                         |       | 22                                          |       | 27 |   | 27 |   |
| Accounting and  legal                                   |       | 224                                         |       | 235 |   | 141 |   |
| Other                                                   |       | 351                                         |       | 233 |   | 142 |   |
| **Total non-interest expense**                          |       | 1,676                                       |       | 996 |   | 635 |   |
|                                                    |       |                                        |       |   |   |   |   |
| **Net Loss before benefit for  income taxes and other** |       | (1,569                                      | )          | (915 | ) | (555 | ) |
|                                                    |       |                                        |       |   |   |   |   |
| **Benefit for income taxes**                            |       | (578                                        | )          | (79 | ) | — |   |
|                                                    |       |                                        |       |   |   |   |   |
| Net Loss before equity  in net income of subsidiaries   |       | (991                                        | )          | (836 | ) | (555 | ) |
|                                                    |       |                                        |       |   |   |   |   |
| Equity in net income of  subsidiaries                   |       | 3,074                                       |       | 2,248 |   | 836 |   |
| **Net Income**                                          |       | $                                           | 2,083      |   | $ | 1,412 |   | $ | 281 |   |

 

105

----

**Statement of Cash Flows**
| ** **                                                | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                     | ** ** |
| **Cash  flows from operating activities:**                |       |                                        |       |   |   |   |   |
| Net income                                                |       | $                                           | 2,083      |   | $ | 1,412 |   | $ | 281 |   |
| Adjustments to  reconcile net income to cash              |       |                                        |       |   |   |   |   |
| provided by  (used in) operating activities:              |       |                                        |       |   |   |   |   |
| Equity in net  (income) of subsidiaries                   |       | (3,074                                      | )          | (2,248 | ) | (836 | ) |
| Realized stock  option compensation expense               |       | 417                                         |       | 85 |   | 83 |   |
| Net amortization  of securities                           |       | 4                                           |       | 2 |   | 7 |   |
| Depreciation                                              |       | 24                                          |       | 23 |   | 13 |   |
| Unrealized gain  on trading securities                    |       | (443                                        | )          | (47 | ) | (110 | ) |
| Purchase of  trading securities, net                      |       | (2,507                                      | )          | (186 | ) | (978 | ) |
| Loss/Income  Attrihutable to minority shareholders        |       | 127                                         |       | — |   | — |   |
| Realized  (gain)/loss on sales of available               |       |                                        |       |   |   |   |   |
| for sale  securities, net                                 |       | (31                                         | )          | (12 | ) | 12 |   |
| Net change in:                                            |       |                                        |       |   |   |   |   |
| Other assets and  liabilities, net                        |       | (2,027                                      | )          | 125 |   | 104 |   |
| **Net  cash used in operating activities**                |       | (5,427                                      | )          | (846 | ) | (1,424 | ) |
|                                                      |       |                                        |       |   |   |   |   |
| **Cash  flows from investing activities:**                |       |                                        |       |   |   |   |   |
| Activity in  available for sale securities:               |       |                                        |       |   |   |   |   |
| Proceeds from  sales and prepayments                      |       | 1,531                                       |       | 542 |   | 2,423 |   |
| Purchases                                                 |       | (4,827                                      | )          | (1,749 | ) | (3,352 | ) |
| Investment in  non-bank subsidiaries, net                 |       | (3,280                                      | )          | — |   | — |   |
| Additional  Investment in non-bank subsidiaries, net      |       | (442                                        | )          | — |   | — |   |
| Purchase of  intangible assets                            |       | (7,500                                      | )          | — |   | — |   |
| Investment in  Bank                                       |       | —                                      |       | (4,240 | ) | (9,900 | ) |
| Investment in  Trust subsidiary                           |       | —                                      |       | (464 | ) | — |   |
| Purchases of  premises and equipment                      |       | (10                                         | )          | (17 | ) | (198 | ) |
| **Net  cash used in investing activities**                |       | (14,528                                     | )          | (5,928 | ) | (11,027 | ) |
|                                                      |       |                                        |       |   |   |   |   |
| **Cash  flows from financing activities:**                |       |                                        |       |   |   |   |   |
| Proceeds from  issuance of short term debt, net           |       | 530                                         |       | — |   | (3,125 | ) |
| Proceeds from  issuance of subordinated debt              |       | —                                      |       | 15,464 |   | — |   |
| Proceeds from  private placement                          |       | 11,539                                      |       | — |   | — |   |
| Proceeds from  exercise of stock warrants                 |       | 3,389                                       |       | — |   | — |   |
| Proceeds from  exercise of stock options                  |       | 10                                          |       | 20 |   | 139 |   |
| Net proceeds  from issuance of common stock               |       | —                                      |       | — |   | 16,122 |   |
| **Net  cash provided by financing activities**            |       | 15,468                                      |       | 15,484 |   | 13,136 |   |
|                                                      |       |                                        |       |   |   |   |   |
| **Net  change in cash and cash equivalents**              |       | (4,487                                      | )          | 8,710 |   | 685 |   |
|                                                      |       |                                        |       |   |   |   |   |
| **Cash  and cash equivalents at beginning of the period** |       | 9,560                                       |       | 850 |   | 165 |   |
| **Cash and cash equivalents at  end of the period**       |       | $                                           | 5,073      |   | $ | 9,560 |   | $ | 850 |   |

 

106

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**NOTE 19 -QUARTERLY DATA(UNAUDITED)**
| ** **                                                                                   | ** ** | **Periods Ended**                                                          | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                                                        | ** ** | **2005** | ** ** |
| ** **                                                                                   | ** ** | **Fourth**                                                                      | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                                                                   | ** ** | **Quarter**                                                                     | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                                                                   | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
|                                                                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest and Dividend  Income                                                                |       | $                                                                               | 10,203     |   | $ | 7,736 |   | $ | 6,916 |   | $ | 6,184 |   | $ | 5,293 |   | $ | 4,643 |   | $ | 3,864 |   | $ | 3,366 |   |
| Interest Expense                                                                             |       | 4,887                                                                           |       | 3,855 |   | 3,274 |   | 3,067 |   | 2,631 |   | 1,964 |   | 1,533 |   | 1,216 |   |
| Net interest income                                                                          |       | 5,316                                                                           |       | 3,881 |   | 3,642 |   | 3,117 |   | 2,662 |   | 2,679 |   | 2,331 |   | 2,150 |   |
|                                                                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for Loan  Losses                                                                   |       | 175                                                                             |       | 247 |   | (124 | ) | 473 |   | 377 |   | 292 |   | 186 |   | 214 |   |
| Net interest income  after Provision for Loan Losses                                         |       | 5,141                                                                           |       | 3,634 |   | 3,766 |   | 2,644 |   | 2,285 |   | 2,387 |   | 2,145 |   | 1,936 |   |
|                                                                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest income                                                                           |       | 677                                                                             |       | 535 |   | 249 |   | 221 |   | 153 |   | 376 |   | 97 |   | 146 |   |
| Noninterest expenses                                                                         |       | 4,102                                                                           |       | 3,250 |   | 3,348 |   | 2,882 |   | 2,569 |   | 2,382 |   | 1,967 |   | 1,905 |   |
|                                                                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (Loss) before  taxes                                                                  |       | 1,716                                                                           |       | 919 |   | 667 |   | (17 | ) | (131 | ) | 381 |   | 275 |   | 177 |   |
|                                                                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income/Losses  attributable to Minority Shareholders                                         |       | 159                                                                             |       | 3 |   | -35 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
|                                                                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for Taxes                                                                          |       | 653                                                                             |       | 382 |   | 33 |   | 7 |   | -710 |   | 0 |   | 0 |   | 0 |   |
|                                                                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income (Loss)                                                                            |       | $                                                                               | 904        |   | $ | 534 |   | $ | 669 |   | $ | (24 | ) | $ | 579 |   | $ | 381 |   | $ | 275 |   | $ | 177 |   |
|                                                                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Comprehensive income  (loss), unrealized gains/losses on securities available for sale |       | (563                                                                            | )          | 186 |   | (83 | ) | 193 |   | (144 | ) | (88 | ) | 266 |   | (225 | ) |
|                                                                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive Income  (Loss)                                                                 |       | $                                                                               | 341        |   | $ | 720 |   | $ | 586 |   | $ | 169 |   | $ | 435 |   | $ | 293 |   | $ | 541 |   | $ | (48 | ) |
|                                                                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings/(loss) per  common share:                                                           |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                        |       | $                                                                               | 0.18       |   | $ | 0.14 |   | $ | 0.20 |   | $ | (0.01 | ) | $ | 0.18 |   | $ | 0.12 |   | $ | 0.09 |   | $ | 0.06 |   |
| Diluted                                                                                      |       | $                                                                               | 0.16       |   | $ | 0.13 |   | $ | 0.19 |   | $ | (0.01 | ) | $ | 0.15 |   | $ | 0.11 |   | $ | 0.09 |   | $ | 0.06 |   |

 

107

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**NOTE 20 – SUBSEQUENT EVENT**

TheCompany declared a 5% stock dividend to shareholders of record February 15,2007 with an ex-dividend date of February 13, 2007. For every 20 shares ofcommon stock held, shareholders will receive one (1) additional share of commonstock. No fractional shares will be issued; fractional shares will be roundedup to the nearest whole share. The transfer agent mailed certificatesrepresenting the 5% stock dividend on or about March 1, 2007.

InJanuary 2007 the Company acquired another 5% of Granite Exchange in the amountof $265,000 from one of its minority shareholders.  This transaction will enable the Company toprepare consolidated tax returns which include Granite Exchange.

108

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**ITEM 9.****                                                ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

None

**ITEM 9A.****              ****CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

TheCompany’s Chief Executive Officer and its Chief Financial Officer, afterevaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of theend of the period covered by this report have concluded that, the Company’sdisclosure controls and procedures were adequate and effective to ensure thatmaterial information relating to the Company and its consolidated subsidiarywould be made known to them by others within those entities, particularlyduring the period in which this annual report was being prepared.

Toassure that financial information is reliable and assets are safeguarded,management maintains an effective system of internal controls and procedures,important elements of which include: careful selection, training and development of operating and financialmanagers; an organization that provides appropriate division of responsibility;and communications aimed at ensuring that Company policies and procedures areunderstood throughout the organization. In establishing internal controls, management weighs the costs of suchsystems against the benefits it believes such systems will provide.

Itshould be noted that in designing and evaluating the disclosure controls andprocedures, management recognizes that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.  TheCompany has designed its disclosure controls and procedures to reach a level ofreasonable assurance of achieving desired control objectives and, based on theevaluation described above, the Company’s Chief Executive Officer and ChiefFinancial Officer (Principal Accounting Officer) concluded that the Company’sdisclosure controls and procedures were effective at reaching that level ofreasonable assurance.

Disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.

**Changesin Internal Controls**

Therewere no substantive changes in the Company’s internal controls or in otherfactors that could significantly affect the Company’s internal controlssubsequent to the end of the period covered by this report.

**ITEM 9B.****              ****OTHER INFORMATION**

None.

109

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**PART III**

**ITEM 10.****              ****DIRECTORS AND EXECUTIVE OFFICERSOF THE REGISTRANT AND CORPORATE GOVERANCE**

Theinformation required by this item can be found in the Company’s DefinitiveProxy Statement pursuant to Regulation 14A under the Securities Exchange Act of1934 and by this reference are incorporated herein.

**ITEM 11.****              ****EXECUTIVE COMPENSATION**

Theinformation required by this item can be found in the Company’s DefinitiveProxy Statement pursuant to Regulation 14A under the Securities Exchange Act of1934 and by this reference are incorporated herein.

**ITEM 12.****                                         ****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

Theinformation in response to Item 201(d) of Regulation S-B can be found in Item 5hereof and is incorporated herein by this reference.  The remaining information required by thisitem can be found in the Company’s Definitive Proxy Statement pursuant toRegulation 14A under the Securities Exchange Act of 1934 and by this referenceare incorporated herein.

**ITEM 13.****              ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS AND DIRECTOR INDEPENDENCE**

Theinformation required by this item can be found in the Company’s DefinitiveProxy Statement pursuant to Regulation 14A under the Securities Exchange Act of1934 and by this reference are incorporated herein.

**ITEM 14.****              ****PRINCIPAL ACCOUNTING FEES ANDSERVICES**

**Pre-Approval Policy for Services of Independent Auditors**

Aspart of its duties, the Audit Committee is required to pre-approve audit andnon-audit services performed by the independent auditors in order to assurethat the provision of such services does not impair the auditors’independence.  On an annual basis, theAudit Committee will review and provide pre-approval for certain types ofservices that may be provided by the independent auditors without obtainingspecific pre-approval from the Audit Committee. If a type of service to be provided by the independent auditors has notreceived pre-approval during this annual process, it will require specificpre-approval by the Audit Committee.  TheAudit Committee does not delegate to management its responsibilities topre-approve services performed by the independent auditors.

**Feesfor Services Provided by Independent Auditors**

Feesfor all services provided by Moss-Adams, LLP the Company’s independent auditorsfor fiscal years 2006 and 2005, are as follows:

110

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**AuditFees**

**Principal Accountant Fees and Services**
|                     | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------------|------------|---------------------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| ** **          | ** ** | **(in thousands)**                                       | ** ** |
| Audit Fees (1)      |       | $                                                             | 97         |   | $ | 97 |   |
| Tax Services (2)    |       | 8                                                             |       | 8 |   |
| Audit Related  Fees |       | 15                                                            |       | 15 |   |
| All Other Fees (3)  |       | 6                                                             |       | 6 |   |
|                     |            |                                                               |            |  |  |  |  |

 

----

(1)                                  Audit fees consist of fees for professionalservices rendered for the audit of The Bank Holdings consolidated financialstatements for 2006 and 2005.  Audit feesfor 2006 and 2005 also include fees and costs associated with SAS 100 reviewsassociated with Form 10-Q filings.

(2)                                  Tax services consist of compliance fees inpreparation of income tax returns.  Taxfees also include various tax planning matters.

(3)                                  Audit related fees consist of due diligencereview work for the Company’s 1031 exchange acquisition and the acquisition ofNNB Holdings, Inc.

111

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**PART IV**

**ITEM 15.  EXHIBITS**

(a)  Exhibits

Thefollowing documents are included or incorporated by reference in this AnnualReport on Form 10-K:
| Exhibit No. | ** ** | **Description**                                                        |
|-------------|------------|------------------------------------------------------------------------|
|        |       |                                                                   |
| 3.1         |       | Articles of Incorporation of The Bank Holdings (1)                     |
|        |       |                                                                   |
| 3.2         |       | Amendment to Articles of Incorporation of The Bank  Holdings (1)       |
|        |       |                                                                   |
| 3.3         |       | By-laws of The Bank Holdings (1)                                       |
|        |       |                                                                   |
| 4.1         |       | Share Certificate (3)                                                  |
|        |       |                                                                   |
| 10.1        |       | 2002 Stock Option Plan (2)                                             |
|        |       |                                                                   |
| 10.2        |       | Amendment to the 2002 Stock Option Plan (7)                            |
|        |       |                                                                   |
| 10.3        |       | Form of Incentive Stock Option Agreement (2)                           |
|        |       |                                                                   |
| 10.4        |       | Form of Non-qualified Stock Option Agreement (2)                       |
|        |       |                                                                   |
| 10.5        |       | Form of Amendment to Non-qualified Stock Option  Agreement (10)        |
|        |       |                                                                   |
| 10.6        |       | Employment Agreement of Harold G. Giomi (8)                            |
|        |       |                                                                   |
| 10.7        |       | Split Dollar Agreement for Hal Giomi (8)                               |
|        |       |                                                                   |
| 10.8        |       | Executive Supplemental Compensation Agreement for  Hal Giomi (8)       |
|        |       |                                                                   |
| 10.9        |       | Employment Agreement of David A. Funk (2)                              |
|        |       |                                                                   |
| 10.10       |       | Split Dollar Agreement for David A. Funk (8)                           |
|        |       |                                                                   |
| 10.11       |       | Executive Supplemental Compensation Agreement for  David A. Funk (8)   |
|        |       |                                                                   |
| 10.12       |       | Employment Agreement of Joe P. Bourdeau (9)                            |
|        |       |                                                                   |
| 10.13       |       | Split Dollar Agreement for Joe P. Bourdeau (8)                         |
|        |       |                                                                   |
| 10.14       |       | Executive Supplemental Compensation Agreement for  Joe P. Bourdeau (8) |
|        |       |                                                                   |
| 10.15       |       | Employment Agreement of Jack B. Buchold (8)                            |
|        |       |                                                                   |
| 10.16       |       | Split Dollar Agreement for Jack B. Buchold (8)                         |
|        |       |                                                                   |
| 10.17       |       | Executive Supplemental Compensation Agreement for  Jack B. Buchold (8) |
|        |       |                                                                   |
| 10.18       |       | Employment Agreement Addendum for Jack B. Buchold  (9)                 |
|        |       |                                                                   |
| 10.19       |       | Employment Agreement of John N. Donovan (6)                            |

112

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| 10.20  |   | Split Dollar Agreement for John N. Donovan (8)                               |
|--------|--------|------------------------------------------------------------------------------|
|   |   |                                                                         |
| 10.21  |   | Executive Supplemental Compensation Agreement for  John N. Donovan (8)       |
|   |   |                                                                         |
| 10.22  |   | Employment Agreement Addendum for John N. Donovan  (9)                       |
|   |   |                                                                         |
| 10.23  |   | Lease Agreement for Incline Village Office (2)                               |
|   |   |                                                                         |
| 10.24  |   | Lease Agreement for Reno Office (2)                                          |
|   |   |                                                                         |
| 10.25  |   | Lease Agreement for Roseville Office (4)                                     |
|   |   |                                                                         |
| 10.26  |   | Lease Agreement for Robb and Mae Ann Office (2)                              |
|   |   |                                                                         |
| 10.27  |   | Deferred Compensation Plan (2)                                               |
|   |   |                                                                         |
| 10.28  |   | Directors Supplemental Insurance Plan Agreement (8)                          |
|   |   |                                                                         |
| 10.29  |   | First Amended and Restated Nevada Security Bank  Split Dollar Agreement (11) |
|   |   |                                                                         |
| 10.30  |   | Indenture (12)                                                               |
|   |   |                                                                         |
| 11.1   |   | Statement re: Computation of Per Share Earnings (5)                          |
|   |   |                                                                         |
| 14.1   |   | Code of Ethics (4)                                                           |
|   |   |                                                                         |
| 21.1   |   | Subsidiaries of Registrant                                                   |
|   |   |                                                                         |
| 23.1   |   | Consent of McGladrey & Pullen, LLP                                       |
|   |   |                                                                         |
| 23.2   |   | Consent of Moss-Adams, LLP                                                   |
|   |   |                                                                         |
| 31.1   |   | Section 302 Certification by Hal Giomi                                       |
|   |   |                                                                         |
| 31.2   |   | Section 302 Certification by Jack Buchold                                    |
|   |   |                                                                         |
| 32.1   |   | Section 706 Certification by Hal Giomi                                       |
|   |   |                                                                         |
| 32.2   |   | Section 706 Certification by Jack Buchold                                    |

 

----

(1)                               This exhibit was previously filed as part of,and is hereby incorporated by reference to, our registration Statement on FormS-4 filed with the Commission on May 21, 2003.

(2)                               This exhibit was previously filed as part of,and is herby incorporated by reference to, our Form 10Q-SB, filed with theCommission on November 14, 2003

(3)                               This exhibit was previously filed as part of,and is hereby incorporated by reference to our Form SB-2 filed with theCommission on December 17, 2003.

(4)                               This exhibit was previously filed as part of,and is hereby incorporated by reference to our Form 10-KSB filed with theCommission on March 30, 2004.

113

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(5)                               Computation of earnings per share isincorporated herein by reference to Note 1 of the Financial Statements.

(6)                               This exhibit was previously filed as part of,and is hereby incorporated by reference from, our Form 10-QSB filed with theCommission on August 16, 2004.

(7)                               This exhibit was previously filed as part of,and is hereby incorporated by reference from, Form 8-K filed with theCommission on June 14, 2005.

(8)                               This exhibit was previously filed as part of,and is hereby incorporated by reference from, Form 8-K filed with the Commissionon September 21, 2005.

(9)                               This exhibit was previously filed as part of,and is hereby incorporated by reference from, Form 8-K filed with theCommission on November 15, 2005.

(10)                         This exhibit was previously filed as part of,and is hereby incorporated by reference from, Form 8-K filed with theCommission on January 4, 2006.

(11)                         This exhibit was previously filed as part of,and is hereby incorporated by reference from, Form 8-K filed with theCommission on January 27, 2006.

(12)                         This exhibit was previously filed as part of,and is hereby incorporated by reference from, of Form 10-QSB filed with theCommission on November 14, 2005.

114

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 1516(d) of the Securitiesand Exchange Act of 1934, the Registrant has duly caused this report to besigned on its behalf by the undersigned thereunto duly authorized.
| Dated: April 2, 2007 | **The Bank Holdings,**                       | ** **                   |
|----------------------|----------------------------------------------|------------------------------|
|                 | a Nevada Corporation                         |                         |
|                 |                                         |                         |
| * *             | By:                                          | * /s/ Harold  G. Giomi* | * * |
|                 | Harold G. Giomi                              |                         |
|                 | Chief Executive Officer                      |                         |
|                 |                                         |                         |
|                 |                                         |                         |
| * *             | By:                                          | * /s/ Jack  B. Buchold* | * * |
|                 | Jack B. Buchold                              |                         |
|                 | Chief Financial Officer                      |                         |
|                 | (principal financial and accounting officer) |                         |
|                      |                                              |                              |  |  |

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.
| Signature             | ** ** | **Title**                            | ** ** | **Date**      |
|-----------------------|------------|--------------------------------------|------------|---------------|
| * *              |       |                                 |       |          |
| */s/ Edward Allison*  |       | Director                             |       | April 2, 2007 |
| Edward Allison        |       |                                 |       |          |
|                  |       |                                 |       |          |
| */s/ Marybel Batjer*  |       | Director                             |       | April 2, 2007 |
| Marybel Batjer        |       |                                 |       |          |
|                  |       |                                 |       |          |
| */s/ Joseph Bourdeau* |       | President and Director               |       | April 2, 2007 |
| Joseph Bourdeau       |       |                                 |       |          |
|                  |       |                                 |       |          |
| */s/ Edward Coppin*   |       | Director                             |       | April 2, 2007 |
| Edward Coppin         |       |                                 |       |          |
|                  |       |                                 |       |          |
| */s/ David A. Funk*   |       | Director                             |       | April 2, 2007 |
| David A. Funk         |       |                                 |       |          |
|                  |       |                                 |       |          |
| */s/ Jesse Haw*       |       | Director                             |       | April 2, 2007 |
| Jesse Haw             |       |                                 |       |          |
|                  |       |                                 |       |          |
| */s/ Kelvin Moss*     |       | Director                             |       | April 2, 2007 |
| Kelvin Moss           |       |                                 |       |          |
|                  |       |                                 |       |          |
| */s/ James Pfrommer*  |       | Director                             |       | April 2, 2007 |
| James Pfrommer        |       |                                 |       |          |
|                  |       |                                 |       |          |
| */s/ Hal Giomi*       |       | Chairman and Chief Executive Officer |       | April 2, 2007 |
| Hal Giomi             |       |                                 |       |          |
|                  |       |                                 |       |          |
| */s/ Jack B. Buchold* |       | Chief Financial Officer              |       | April 2, 2007 |
| Jack B. Buchold       |       |                                 |       |          |

 

115

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**FINANCIALTABLES**

**Appendix 1 - Average Balances and Rates**

Thefollowing table sets forth, for the periods indicated, information regarding(i) the total dollar amount of interest income on interest-earning assets andthe resultant average yields; (ii) the total dollar amount of interest expenseon interest-bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest rate spread; and (v) net interest margin.
| ** **                                          | ** ** | **For the Year Ended December 31,** | ** ** | **For the Year Ended December 31,** | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006(a,b)**                                                | ** ** | **2005(a,b)**                                                | ** ** | **2004(a,b)**                                                | ** ** |
| ** **                                          | ** ** | **Average**                                                  | ** ** | ** **                                                   | ** ** | **Yield/**                                                   | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                                                  | ** ** | **Interest**                                                 | ** ** | **Rate**                                                     | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**                         | ** ** |
| **Assets**                                          | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investments:                                        |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal  Funds Sold and Interest Bearing Deposits   |       | $                                                            | 18,858     |                                                         | $          | 950                                                          |       | 5.04 | % | $ | 7,470 |   | $ | 248 |   | 3.32 | % | $ | 6,080 |   | $ | 96 |   | 1.58 | % |
| Securities                                          |       | 91,736                                                       |       | 3,893                                                        |       | 4.24                                                         | %          | 69,668 |   | 2,362 |   | 3.39 | % | 90,242 |   | 2,885 |   | 3.20 | % |
| Equity                                              |       | 7,771                                                        |       | 242                                                          |       | 3.11                                                         | %          | 2,861 |   | 83 |   | 2.90 | % | 1,351 |   | 34 |   | 2.52 | % |
| Total  Investments                                  |       | 118,365                                                      |       | 5,085                                                        |       | 4.30                                                         | %          | 79,999 |   | 2,693 |   | 3.37 | % | 97,673 |   | 3,015 |   | 3.09 | % |
|                                                |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture                                         |       | 13,075                                                       |       | 836                                                          |       | 6.39                                                         | %          | 15,754 |   | 825 |   | 5.24 | % | 17,281 |   | 696 |   | 4.03 | % |
| Commercial                                          |       | 43,912                                                       |       | 3,905                                                        |       | 8.89                                                         | %          | 30,070 |   | 2,129 |   | 7.08 | % | 21,818 |   | 1,294 |   | 5.93 | % |
| Real  Estate Construction                           |       | 120,027                                                      |       | 10,612                                                       |       | 8.84                                                         | %          | 53,986 |   | 3,874 |   | 7.18 | % | 24,938 |   | 1,358 |   | 5.45 | % |
| Real  Estate Term                                   |       | 129,439                                                      |       | 10,453                                                       |       | 8.08                                                         | %          | 98,387 |   | 7,465 |   | 7.59 | % | 53,664 |   | 3,914 |   | 7.29 | % |
| Consumer                                            |       | 1,757                                                        |       | 130                                                          |       | 7.40                                                         | %          | 2,946 |   | 169 |   | 5.74 | % | 4,627 |   | 248 |   | 5.35 | % |
| Credit  Card and Overdraft Protection               |       | 148                                                          |       | 18                                                           |       | 12.16                                                        | %          | 91 |   | 11 |   | 12.09 | % | 89 |   | 11 |   | 12.36 | % |
| Other                                               |       | 53                                                           |       | —                                                       |       | 0.00                                                         | %          | 33 |   | — |   | 0.00 | % | 37 |   | — |   | 0.00 | % |
| Total  Loans                                        |       | 308,411                                                      |       | 25,954                                                       |       | 8.42                                                         | %          | 201,267 |   | 14,473 |   | 7.19 | % | 122,454 |   | 7,521 |   | 6.14 | % |
| Total Earning Assets                                |       | 426,776                                                      |       | 31,039                                                       |       | 7.27                                                         | %          | 281,266 |   | 17,166 |   | 6.10 | % | 220,127 |   | 10,536 |   | 4.79 | % |
| Non-Earning Assets                                  |       | 25,403                                                       |       |                                                         |       |                                                         |       | 12,314 |   |   |   |   |   | 13,312 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                                            | 452,179    |                                                         |       |                                                         |       |   | $ | 293,580 |   |   |   |   |   | $ | 233,439 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Bearing  Deposits:                         |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                                            | 7,886      |                                                         | $          | 76                                                           |       | 0.96 | % | $ | 7,200 |   | $ | 19 |   | 0.26 | % | $ | 6,441 |   | $ | 12 |   | 0.19 | % |
| Savings  Accounts                                   |       | 80,839                                                       |       | 3,202                                                        |       | 3.96                                                         | %          | 2,533 |   | 13 |   | 0.51 | % | 2,331 |   | 12 |   | 0.51 | % |
| Money  Market                                       |       | 113,130                                                      |       | 4,424                                                        |       | 3.91                                                         | %          | 128,195 |   | 4,049 |   | 3.16 | % | 126,261 |   | 2,739 |   | 2.17 | % |
| IRA’s                                          |       | 1,626                                                        |       | 62                                                           |       | 3.81                                                         | %          | 1,069 |   | 28 |   | 2.62 | % | 840 |   | 14 |   | 1.67 | % |
| Certificates  of Deposit<$100,000                |       | 69,345                                                       |       | 3,285                                                        |       | 4.74                                                         | %          | 37,861 |   | 1,425 |   | 3.76 | % | 5,396 |   | 98 |   | 1.82 | % |
| Certificates  of Deposit>$100,000                |       | 42,554                                                       |       | 1,831                                                        |       | 4.30                                                         | %          | 33,457 |   | 1,143 |   | 3.42 | % | 26,361 |   | 568 |   | 2.15 | % |
| Total  Interest Bearing Deposits                    |       | 315,380                                                      |       | 12,880                                                       |       | 4.08                                                         | %          | 210,315 |   | 6,677 |   | 3.17 | % | 167,630 |   | 3,443 |   | 2.05 | % |
| Borrowed Funds:                                     |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Short  term debt                                    |       | 24,599                                                       |       | 1,155                                                        |       | 4.70                                                         | %          | 1,779 |   | 667 |   | 3.87 | % | 10,334 |   | 226 |   | 2.19 | % |
| Long  term debt                                     |       | 17,697                                                       |       | 1,048                                                        |       | 5.92                                                         | %          | 15,464 |   | — |   | — |   | — |   | — |   | — |   |
| Total  Borrowed Funds                               |       | 42,296                                                       |       | 2,203                                                        |       | 5.21                                                         | %          | 17,243 |   | 667 |   | 3.87 | % | 10,334 |   | 226 |   | 2.19 | % |
| Total  Interest Bearing Liabilities                 |       | 357,676                                                      |       | 15,083                                                       |       | 4.22                                                         | %          | 227,558 |   | 7,344 |   | 3.23 | % | 177,964 |   | 3,669 |   | 2.06 | % |
| Demand Deposits                                     |       | 44,552                                                       |       |                                                         |       |                                                         |       | 35,007 |   |   |   |   |   | 31,675 |   |   |   |   |   |
| Other Liabilities                                   |       | 8,695                                                        |       |                                                         |       |                                                         |       | 2,954 |   |   |   |   |   | 710 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 41,256                                                       |       |                                                         |       |                                                         |       | 28,061 |   |   |   |   |   | 23,090 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                                            | 452,179    |                                                         |       |                                                         |       |   | $ | 293,580 |   |   |   |   |   | $ | 233,439 |   |   |   |   |   |
| ** **                                          | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest Rate Spread (d)**                        |       |                                                         |       |                                                         |       | 3.05                                                         | %          |   |   |   |   | 2.87 | % |   |   |   |   | 2.73 | % |
|                                                |       |                                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income/Earning  Assets                     |       |                                                         |       |                                                         |       | 7.27                                                         | %          |   |   |   |   | 6.10 | % |   |   |   |   | 4.79 | % |
| Interest Expense/Earning  Assets                    |       |                                                         |       |                                                         |       | 3.53                                                         | %          |   |   |   |   | 2.61 | % |   |   |   |   | 1.67 | % |
| **Net Interest Income and Margin (e)**              |       |                                                         |       | $                                                            | 15,956     |                                                         | 3.74       | % |   |   | $ | 9,822 |   | 3.49 | % |   |   | $ | 6,867 |   | 3.12 | % |

 

----

(a)  Average balances are obtained from the bestavailable daily or monthly data.

(b)  Yields are reflected on a tax equivalentbasis.

(c)  Loans are gross of the allowance for possibleloan losses, deferred fees and related direct costs.

(d)  Represents the difference between the yieldon interest-earning assets and the cost of interest-bearing liabilities.

(e)  Net interest margin represents net interestincome as a percentage of average interest-earning assets.

Appendix 1

----

 

**Appendix 2 - Changes in Net Interest Income**

Thefollowing table presents certain information regarding changes in our interestincome and interest expense for the periods indicated. For each category ofinterest-earning assets and interest-bearing liabilities, information isprovided with respect to changes attributable to (i) changes in volume (changein volume multiplied by prior year rate), (ii) changes in rate (change in ratemultiplied by prior year volume) and (iii) changes in rate/volume (Change inrate multiplied by change in volume).
| ** **                                           | ** ** | **For the Year Ended December, 31** | ** ** | **For the Year Ended December, 31** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006 vs. 2005**                                  | ** ** | **2005 vs. 2004**                                  | ** ** |
| ** **                                           | ** ** | **Increase (Decrease) Due to**                | ** ** | **Increase (Decrease) Due to**                | ** ** |
| ** **                                           | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | **Rate and** | ** ** | **Total** | ** ** | ** ** | ** ** | ** ** | ** ** | **Rate and** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **Volume**                                                   | ** ** | **Rate**                                                     | ** ** | **Volume (1)** | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Volume (1)** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**                         | ** ** | **(Dollars in thousands)**                         | ** ** |
| **Interest Income**                                  | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investments:                                         |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds  sold and other short term investments |       | $                                                            | 378        |                                                         | $          | 128 |   | $ | 196 |   | $ | 702 |   | $ | 22 |   | $ | 106 |   | $ | 24 |   | $ | 152 |   |
| Securities                                           |       | 748                                                          |       | 592                                                          |       | 191 |   | 1,531 |   | (658 | ) | 171 |   | (36 | ) | (523 | ) |
| Equity                                               |       | 142                                                          |       | 6                                                            |       | 11 |   | 159 |   | 38 |   | 5 |   | 6 |   | 49 |   |
| Total Investment Income                              |       | 1,268                                                        |       | 726                                                          |       | 398 |   | 2,392 |   | (598 | ) | 282 |   | (6 | ) | (322 | ) |
|                                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                               |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture                                          |       | (140                                                         | )          | 181                                                          |       | (30 | ) | 11 |   | (62 | ) | 209 |   | (18 | ) | 129 |   |
| Commercial                                           |       | 980                                                          |       | 544                                                          |       | 252 |   | 1,776 |   | 489 |   | 251 |   | 95 |   | 835 |   |
| Real Estate Construction                             |       | 4,149                                                        |       | 1,247                                                        |       | 1,342 |   | 6,738 |   | 1,583 |   | 431 |   | 502 |   | 2,516 |   |
| Real Estate Term                                     |       | 2,357                                                        |       | 482                                                          |       | 149 |   | 2,988 |   | 3,260 |   | 161 |   | 130 |   | 3,551 |   |
| Consumer                                             |       | (68                                                          | )          | 49                                                           |       | (20 | ) | (39 | ) | (90 | ) | 18 |   | (7 | ) | (79 | ) |
| Credit Card and Overdraft Protection                 |       | 7                                                            |       | —                                                       |       | — |   | 7 |   | — |   | — |   | — |   | — |   |
| Total Loan Income                                    |       | 7,285                                                        |       | 2,503                                                        |       | 1,693 |   | 11,481 |   | 5,180 |   | 1,070 |   | 702 |   | 6,952 |   |
|                                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total  Interest Income**                           |       | 8,553                                                        |       | 3,229                                                        |       | 2,091 |   | 13,873 |   | 4,582 |   | 1,352 |   | 696 |   | 6,630 |   |
|                                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Expense**                                 | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Bearing  Deposits:                          |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now Accounts                                         |       | 2                                                            |       | 50                                                           |       | 5 |   | 57 |   | 1 |   | 5 |   | 1 |   | 7 |   |
| Savings                                              |       | 399                                                          |       | 87                                                           |       | 2,703 |   | 3,189 |   | 1 |   | — |   | — |   | 1 |   |
| Money market                                         |       | (476                                                         | )          | 961                                                          |       | (110 | ) | 375 |   | 42 |   | 1,250 |   | 18 |   | 1,310 |   |
| IRA’s                                           |       | 15                                                           |       | 13                                                           |       | 6 |   | 34 |   | 4 |   | 8 |   | 2 |   | 14 |   |
| Certificates of deposit<$100,000                  |       | 1,184                                                        |       | 371                                                          |       | 305 |   | 1,860 |   | 591 |   | 105 |   | 631 |   | 1,327 |   |
| Certificates of deposit>$100,000                  |       | 311                                                          |       | 294                                                          |       | 83 |   | 688 |   | 153 |   | 335 |   | 87 |   | 575 |   |
| Total  interest-bearing deposits                     |       | 1,435                                                        |       | 1,776                                                        |       | 2,992 |   | 6,203 |   | 792 |   | 1,703 |   | 739 |   | 3,234 |   |
| ** **                                           | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Borrowed Funds                                       |       | 970                                                          |       | 231                                                          |       | 335 |   | 1,536 |   | 151 |   | 174 |   | 116 |   | 441 |   |
|                                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total  interest expense**                          |       | 2,405                                                        |       | 2,007                                                        |       | 3,327 |   | 7,739 |   | 943 |   | 1,877 |   | 855 |   | 3,675 |   |
|                                                 |       |                                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net  Interest Income**                             |       | $                                                            | 6,148      |                                                         | $          | 1,222 |   | $ | (1,236 | ) | $ | 6,134 |   | $ | 3,639 |   | $ | (525 | ) | $ | (159 | ) | $ | 2,955 |   |

 

----

(1) Includes changes in interest income and expense not due solely tovolume or rate changes.

Appendix 2

----

 

**Appendix 3- Non-Interest Income and Non-Interest Expense**

Thefollowing table sets forth the various components of the Company’s non-interestincome and expense for the periods indicated.
| ** **                                                          | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                                     | ** ** | **% of Total** | ** ** | **2005** | ** ** | **% of Total** | ** ** | **2004** | ** ** | **% of Total** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)**                         | ** ** |
| **Other  Operating Income**                                         |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                 |       | $                                                            | 261        |   | 15.52 | % | $ | 253 |   | 32.77 | % | $ | 193 |   | 45.95 | % |
| Other service charges, commissions and fees                         |       | 19                                                           |       | 1.13 | % | 23 |   | 2.98 | % | 20 |   | 4.76 | % |
| Loan charges and fees                                               |       | 162                                                          |       | 9.63 | % | 95 |   | 12.31 | % | 62 |   | 14.76 | % |
| Pre-underwriting fees                                               |       | 9                                                            |       | 0.54 | % | 25 |   | 3.24 | % | 154 |   | 36.67 | % |
| Income on bank owned life insurance                                 |       | 307                                                          |       | 18.25 | % | 313 |   | 40.54 | % | — |   | 0.00 | % |
| Exchange fee income                                                 |       | 448                                                          |       | 26.63 | % | — |   | 0.00 | % | — |   | 0.00 | % |
| Unrealized gains on trading securities                              |       | 443                                                          |       | 26.34 | % | 47 |   | 6.09 | % | 110 |   | 26.19 | % |
| Gain on the sale of fixed assets                                    |       | 2                                                            |       | 0.12 | % | 4 |   | 0.52 | % | 9 |   | 2.14 | % |
| Gain/(loss) on the sale of investments                              |       | 31                                                           |       | 1.84 | % | 12 |   | 1.55 | % | (128 | ) | -30.48 | % |
| Total non-interest income                                           |       | 1,682                                                        |       | 100.00 | % | 772 |   | 100.00 | % | 420 |   | 100.00 | % |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| As a percent of  average earning assets                             |       |                                                         |       | 0.39 | % |   |   | 0.27 | % |   |   | 0.19 | % |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| **Other  Operating Expense:**                                       |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                      |       | 7,617                                                        |       | 56.08 | % | 4,222 |   | 47.85 | % | 2,743 |   | 43.94 | % |
| Occupancy costs                                                     |       | 1,921                                                        |       | 14.14 | % | 1,532 |   | 17.36 | % | 1,330 |   | 21.31 | % |
| Advertising and marketing costs                                     |       | 527                                                          |       | 3.88 | % | 335 |   | 3.80 | % | 237 |   | 3.80 | % |
| Data processing costs                                               |       | 960                                                          |       | 7.07 | % | 733 |   | 8.31 | % | 369 |   | 5.91 | % |
| Deposit services costs                                              |       | 459                                                          |       | 3.38 | % | 259 |   | 2.94 | % | 213 |   | 3.41 | % |
| Loan servicing costs                                                |       | 25                                                           |       | 0.18 | % | 2 |   | 0.02 | % | 7 |   | 0.11 | % |
| Provision for undisbursed loan commitments                          |       | 120                                                          |       | 0.88 | % | 64 |   | 0.73 | % | 86 |   | 1.38 | % |
| Telephone and postage costs                                         |       | 305                                                          |       | 2.25 | % | 214 |   | 2.42 | % | 138 |   | 2.21 | % |
| Legal and accounting                                                |       | 371                                                          |       | 2.73 | % | 515 |   | 5.84 | % | 519 |   | 8.31 | % |
| Other professional services                                         |       | 199                                                          |       | 1.46 | % | 468 |   | 5.30 | % | 257 |   | 4.12 | % |
| Director fees                                                       |       | 291                                                          |       | 2.14 | % | 82 |   | 0.93 | % | 64 |   | 1.03 | % |
| Travel and education costs                                          |       | 281                                                          |       | 2.07 | % | 121 |   | 1.37 | % | 117 |   | 1.87 | % |
| Stationery and supplies                                             |       | 186                                                          |       | 1.37 | % | 109 |   | 1.24 | % | 120 |   | 1.92 | % |
| Other                                                               |       | 320                                                          |       | 2.36 | % | 167 |   | 1.89 | % | 42 |   | 0.67 | % |
| Total non-interest expense                                          |       | $                                                            | 13,582     |   | 100.00 | % | $ | 8,823 |   | 100.00 | % | $ | 6,242 |   | 100.00 | % |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| As a percentage  of average earning assets                          |       |                                                         |       | 3.18 | % |   |   | 3.14 | % |   |   | 2.84 | % |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Net non-interest  expense as a percentage of average earning assets |       |                                                         |       | 2.79 | % |   |   | 2.86 | % |   |   | 2.64 | % |
|                                                                |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio (a)                                                |       |                                                         |       | 77.15 | % |   |   | 83.41 | % |   |   | 84.28 | % |

 

----

(a)  Represents non-interestexpenses as a percentage of net interest income and non-interest incomeexcluding securities gains and losses.

Appendix 3

----

 

**Appendix4 - Securities Available for Sale,  Heldto Maturity and Trading**

The followingtable sets forth our investment securities as of the dates indicated.
| ** **                                                          | ** ** | **December 31,**                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2006**                             | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| ** **                                                          | ** ** | **Amortized**                        | ** ** | **Fair Market**  | ** ** | **Amortized**         | ** ** | **Fair Market** | ** ** | **Amortized** | ** ** | **Fair Market** | ** ** |
| ** **                                                          | ** ** | **Cost**                             | ** ** | **Value**             | ** ** | **Cost**              | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** |
| Available for  Sale                                                 |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
|                                                                |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| US Treasury and Government Agency Securities                        |       | $                                    | 10,347     |                  | $          | 10,105                |       | $ | 16,470 |   | $ | 16,000 |   | $ | 14,493 |   | $ | 14,151 |   |
| Corporate bonds                                                     |       | 3,611                                |       | 3,599                 |       | 1,032                 |       | 1,006 |   | 909 |   | 902 |   |
| State & municipal                                               |       | 500                                  |       | 494                   |       | 500                   |       | 484 |   | 500 |   | 487 |   |
| Preferred Securities                                                |       | 404                                  |       | 408                   |       |                  |       |   |   |   |   |   |   |
| Mortgage-backed securities                                          |       | 1,758                                |       | 1,731                 |       | 2,064                 |       | 2,022 |   | — |   | — |   |
| Subtotal, Available for Sale                                        |       | $                                    | 16,620     |                  | $          | 16,337                |       | $ | 20,066 |   | $ | 19,512 |   | $ | 15,902 |   | $ | 15,540 |   |
|                                                                |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| Held to Maturity                                                    |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
|                                                                |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| US Treasury and Government Agency Securities                        |       | $                                    | 25,338     |                  | $          | 25,293                |       | $ | 20,740 |   | $ | 20,518 |   | $ | 7,984 |   | $ | 7,917 |   |
| Mortgage-backed securities                                          |       | 35,821                               |       | 35,016                |       | 40,873                |       | 39,783 |   | 44,095 |   | 43,680 |   |
| Corporate bonds                                                     |       | 789                                  |       | 809                   |       | 1,284                 |       | 1,310 |   | 1,279 |   | 1,365 |   |
| State & municipal                                               |       | 14,642                               |       | 14,699                |       | 1,412                 |       | 1,437 |   | 230 |   | 265 |   |
| Subtotal, Held to Maturity                                          |       | $                                    | 76,590     |                  | $          | 75,817                |       | $ | 64,309 |   | $ | 63,048 |   | $ | 53,588 |   | $ | 53,227 |   |
|                                                                |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| Fair value as a %  of amortized cost of Held to Maturity Securities |       |                                 |       | 99.0                  | %          |                  |       | 98.0 | % |   |   | 99.3 | % |
|                                                                |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| Trading  Securities Equity Investments                              |       | 3,648                                |       | 4,299                 |       | 1,141                 |       | 1,283 |   | 970 |   | 1,088 |   |
|                                                                |       |                                 |       |                  |       |                  |       |   |   |   |   |   |   |
| Total Securities                                                    |       | $                                    | 96,858     |                  | $          | 96,453                |       | $ | 85,516 |   | $ | 83,843 |   | $ | 70,460 |   | $ | 69,855 |   |

 

Appendix 4

----

 

**Appendix5 - Maturities of Securities**

The following table sets forth the contractual maturities and taxequivalent weighted average yields of our debt securities as of December 31,2006.  Actual maturities will differ fromcontractual maturities because borrowers may have the right to call or prepayobligations with or without call or prepayment penalties.
| ** **                           | ** ** | **Carrying Value Maturing in** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **More Than 5** | ** ** | **More Than** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Less than 1 Year**           | ** ** | **1 to 5 Years** | ** ** | **to 10 Years** | ** ** | **10 years** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **Amount**                                    | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)**          | ** ** |
| Available for  Sale Securities       |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government Agencies               |       | $                                             | 1,985      |   | 2.55 | % | $ | 4,625 |   | 3.90 | % | $ | 3,495 |   | 4.81 | % | $ | — |   |   |   | $ | 10,105 |   | 3.95 | % |
| Mortgage-backed Securities           |       | —                                        |       | — |   | — |   | — |   | $ | — |   | — |   | 1,731 |   | 5.19 | % | 1,731 |   | 5.19 | % |
| State & Municipal                |       | 494                                           |       | 2.57 | % | — |   | — |   | — |   | — |   | — |   | — |   | 494 |   | 2.57 | % |
| Preferred Securities                 |       | —                                        |       | — |   | — |   | — |   | — |   | — |   | 408 |   | 2.88 | % | 408 |   | 2.88 | % |
| Corporate Bonds                      |       | —                                        |       | — |   | — |   | — |   | 28 |   | 6.71 | % | 3,571 |   | 3.48 | % | 3,599 |   | 3.50 | % |
| Total Available  for Sale Securities |       | $                                             | 2,479      |   |   |   | $ | 4,625 |   |   |   | $ | 3,523 |   |   |   | $ | 5,710 |   |   |   | $ | 16,337 |   | 3.91 | % |
|                                 |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity  Securities         |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government Agencies               |       | $                                             | 9,216      |   | 3.32 | % | $ | 11,396 |   | 5.07 | % | $ | 4,726 |   | 5.87 | % | $ | — |   | — |   | $ | 25,338 |   | 4.58 | % |
| Mortgage-backed Securities           |       | 21                                            |       | 3.18 | % | 2,758 |   | 3.44 | % | 14,397 |   | 4.16 | % | 18,645 |   | 4.41 | % | 35,821 |   | 4.23 | % |
| State & Municipal                |       | —                                        |       | — |   | — |   | — |   | 4,192 |   | 5.55 | % | 10,450 |   | 6.10 | % | 14,642 |   | 5.66 | % |
| Corporate Bonds                      |       | —                                        |       | — |   | 789 |   | 6.51 | % | — |   | — |   | — |   | — |   | 789 |   | 6.51 | % |
| Total Held to  Maturity Securities   |       | $                                             | 9,237      |   |   |   | $ | 14,943 |   |   |   | $ | 23,315 |   |   |   | $ | 29,095 |   |   |   | $ | 76,590 |   | 4.70 | % |
|                                 |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment  Securities         |       | $                                             | 11,716     |   |   |   | $ | 19,568 |   |   |   | $ | 26,838 |   |   |   | $ | 34,805 |   |   |   | $ | 92,927 |   | 4.56 | % |

 

Appendix 5

----

 

**Appendix 6 - Composition of Loan Portfolio**

The following table sets forth the composition of our loan portfolio atthe dates indicated.
| ** **                            | ** ** | **As of**                       | ** ** | **As of**        | ** ** | **As of**        | ** ** | **As of**        | ** ** | **As of**        | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **December 31,**                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                            | ** ** | **2006**                             | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003**              | ** ** | **2002**              | ** ** |
| ** **                            | ** ** | ** **                           | ** ** | **% of**         | ** ** | ** **            | ** ** | **% of**         | ** ** | ** **            | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                            | ** ** | **Amount**                           | ** ** | **Loans**             | ** ** | **Amount**            | ** ** | **Loans**             | ** ** | **Amount**            | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                            | ** ** | ** **                           | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| USDA Agriculture  Loans               |       | $                                    | 12,698     |                  | 2.74       | %                     | $          | 13,528                |       | 5.52                  | %          | $ | 16,763 |   | 10.43 | % | $ | 10,876 |   | 13.16 | % | $ | — |   | 0.00 | % |
| ** **                            | ** ** | ** **                           | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commercial and  Industrial            |       |                                 |       |                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Revolving Lines of Credit             |       | 38,271                               |       | 8.25                  | %          | 18,066                |       | 7.37                  | %          | 5,171                 |       | 3.22 | % | 3,218 |   | 3.89 | % | 643 |   | 2.57 | % |
| Other Collateral                      |       | 21,212                               |       | 4.57                  | %          | 16,694                |       | 6.81                  | %          | 14,130                |       | 8.79 | % | 8,792 |   | 10.63 | % | 1,758 |   | 7.03 | % |
| Unsecured                             |       | 16,885                               |       | 3.64                  | %          | 3,669                 |       | 1.50                  | %          | 5,671                 |       | 3.53 | % | 3,529 |   | 4.27 | % | 3,107 |   | 12.42 | % |
| Participations                        |       | (2,000                               | )          | -0.43                 | %          | —                |       | 0.00                  | %          | —                |       | 0.00 | % | — |   | 0.00 | % | — |   | 0.00 | % |
| Total Commercial Loans                |       | 74,368                               |       | 16.03                 | %          | 38,429                |       | 15.67                 | %          | 24,972                |       | 15.54 | % | 15,539 |   | 18.80 | % | 3,107 |   | 12.43 | % |
|                                  |       |                                 |       |                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Real Estate  Construction:            |       |                                 |       |                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition and Land                  |       | 50,826                               |       | 10.96                 | %          | 32,137                |       | 13.11                 | %          | 9,170                 |       | 5.71 | % | 5,544 |   | 6.71 | % | 2,745 |   | 10.98 | % |
| Single Family Residences              |       | 63,255                               |       | 13.64                 | %          | 26,615                |       | 10.86                 | %          | 14,704                |       | 9.15 | % | 8,888 |   | 10.75 | % | 4,401 |   | 17.60 | % |
| Multi-family                          |       | —                               |       | 0.00                  | %          | —                |       | 0.00                  | %          | —                |       | 0.00 | % | — |   | 0.00 | % | — |   | 0.00 | % |
| Commercial                            |       | 49,099                               |       | 10.58                 | %          | 19,664                |       | 8.02                  | %          | 9,534                 |       | 5.93 | % | 5,764 |   | 6.97 | % | 2,854 |   | 11.41 | % |
| Government Guaranteed                 |       | 3,001                                |       | 0.65                  | %          | 1,026                 |       | 0.42                  | %          | —                |       | 0.00 | % | — |   | 0.00 | % | — |   | 0.00 | % |
| Participations                        |       | (12,419                              | )          | -2.68                 | %          | (5,253                | )          | -2.14                 | %          | —                |       | 0.00 | % | — |   | 0.00 | % | — |   | 0.00 | % |
| Total Real Estate Construction Loans  |       | 153,761                              |       | 33.15                 | %          | 74,189                |       | 30.26                 | %          | 33,408                |       | 20.79 | % | 20,196 |   | 24.43 | % | 9,999 |   | 39.99 | % |
|                                  |       |                                 |       |                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Real Estate Term:                     |       |                                 |       |                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Single Family Residences              |       | 878                                  |       | 0.19                  | %          | 5,284                 |       | 2.16                  | %          | 4,779                 |       | 2.97 | % | 4,309 |   | 5.21 | % | 642 |   | 2.57 | % |
| Multi-family                          |       | 6,729                                |       | 1.45                  | %          | 6,848                 |       | 2.79                  | %          | —                |       | 0.00 | % | 3,903 |   | 4.72 | % | — |   | 0.00 | % |
| Commercial                            |       | 217,465                              |       | 46.88                 | %          | 97,732                |       | 39.86                 | %          | 65,246                |       | 40.60 | % | 22,683 |   | 27.44 | % | 9,276 |   | 37.10 | % |
| Government Guaranteed                 |       | 915                                  |       | 0.20                  | %          | 196                   |       | 0.08                  | %          | 3,409                 |       | 2.12 | % | — |   | 0.00 | % | — |   | 0.00 | % |
| Participations                        |       | (10,936                              | )          | -2.36                 | %          | —                |       | 0.00                  | %          | (1,089                | )          | -0.68 | % | — |   | 0.00 | % | — |   | 0.00 | % |
| Total Real Estate Term Loans          |       | 215,052                              |       | 46.36                 | %          | 110,060               |       | 44.89                 | %          | 72,345                |       | 45.02 | % | 30,895 |   | 37.37 | % | 9,918 |   | 39.66 | % |
|                                  |       |                                 |       |                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Total Real Estate  Loans              |       | 368,813                              |       | 79.51                 | %          | 184,249               |       | 75.15                 | %          | 105,753               |       | 65.80 | % | 51,091 |   | 61.80 | % | 19,917 |   | 79.65 | % |
|                                  |       |                                 |       |                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Consumer Loans:                       |       |                                 |       |                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Consumer                              |       | 1,848                                |       | 0.40                  | %          | 3,408                 |       | 1.39                  | %          | 6,391                 |       | 3.98 | % | 4,181 |   | 5.06 | % | 773 |   | 3.09 | % |
| Home Equity Lines of Credit           |       | 5,710                                |       | 1.23                  | %          | 5,417                 |       | 2.21                  | %          | 6,757                 |       | 4.20 | % | 929 |   | 1.12 | % | 888 |   | 3.55 | % |
| Credit Cards and Overdraft Protection |       | 364                                  |       | 0.08                  | %          | 93                    |       | 0.04                  | %          | 72                    |       | 0.04 | % | 55 |   | 0.07 | % | 320 |   | 1.28 | % |
| Other                                 |       | 57                                   |       | 0.01                  | %          | 61                    |       | 0.02                  | %          | 1                     |       | 0.00 | % | — |   | 0.00 | % |   |   | 0.00 | % |
| Total Consumer Loans                  |       | 7,979                                |       | 1.72                  | %          | 8,979                 |       | 3.66                  | %          | 13,220                |       | 8.23 | % | 5,165 |   | 6.25 | % | 1,981 |   | 7.92 | % |
|                                  |       |                                 |       |                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Total Gross Loans                     |       | 463,858                              |       | 100.00                | %          | 245,185               |       | 100.00                | %          | 160,708               |       | 100.00 | % | 82,671 |   | 100.00 | % | 25,005 |   | 100.00 | % |
|                                  |       |                                 |       |                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Less:                                 |       |                                 |       |                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for Loan Losses             |       | 5,430                                |       |                  |       | 2,655                 |       |                  |       | 1,586                 |       |   |   | 822 |   |   |   | 220 |   |   |   |
| Net Unearned Loan Fees/Costs          |       | 997                                  |       |                  |       | 356                   |       |                  |       | 597                   |       |   |   | 224 |   |   |   | 173 |   |   |   |
| Net Loans                             |       | $                                    | 457,431    |                  |       |                  | $          | 242,174               |       |                  |       | $ | 158,525 |   |   |   | $ | 81,625 |   |   |   | $ | 24,05612 |   |   |   |

 

Appendix 6

----

 

**Appendix 7- Scheduled Contractual Maturities of theLoan Portfolio**

The followingtable sets forth the scheduled contractual amortization of our loan portfolioat December 31, 2006 as well as the amount of loans which are scheduled tomature after one year which have fixed or adjustable interest rates.
| ** **                                          | ** ** | **USDA Agriculture** | ** ** | **Commerical** | ** ** | **Real Estate** | ** ** | **Consumer** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|----------------|------------|----------------------|------------|--------------|------------|-----------|------------|
|                                                |       |                      |       |           |       |                 |       |         |       |      |       |
| Amounts due:                                        |       |                      |       |           |       |                 |       |         |       |      |       |
| Within one year                                     |       | $                         | —     |           | $          | 36,965               |       | $            | 172,686    |      | $          | 2,119 |   | $ | 211,770 |   |
| After one year through five years                   |       | —                    |       | 27,813         |       | 34,150               |       | 249          |       | $         | 62,212     |   |
| Beyond five years                                   |       | 12,698                    |       | 9,590          |       | 161,977              |       | 5,611        |       | $         | 189,876    |   |
|                                                |       |                      |       |           |       |                 |       |         |       |      |       |
| Total                                               |       | $                         | 12,698     |           | $          | 74,368               |       | $            | 368,813    |      | $          | 7,979 |   | $ | 463,858 |   |
|                                                |       |                      |       |           |       |                 |       |         |       |      |       |
| Interest Rate  Terms on amounts due after one year: |       |                      |       |           |       |                 |       |         |       |      |       |
|                                                |       |                      |       |           |       |                 |       |         |       |      |       |
| Fixed                                               |       | $                         | 7,416      |           | $          | 10,021               |       | $            | 30,071     |      | $          | 150 |   | $ | 47,658 |   |
| Adjustable                                          |       | $                         | 5,282      |           | $          | 27,382               |       | $            | 166,056    |      | $          | 5,710 |   | $ | 204,430 |   |

 

Appendix 7

----

 

**Appendix8 - Table of Activity in the Allowance for Loan Losses**

The followingtable sets forth information concerning the activity in our allowance for loan lossesduring the periods indicated.
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)**       | ** ** |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| **Allowance  at the beginning of the period**                       |       | $                                          | 2,655      |   | $ | 1,586 |   | $ | 822 |   | $ | 220 |   | $ | — |   |
| ** **                                                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allowance  contributed by Northern Nevada Bank                      |       | 1,951                                      |       | — |   | — |   | — |   | — |   |
| ** **                                                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Charge-offs:**                                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Agricultural                                                        |       | —                                     |       | — |   | — |   | — |   | — |   |
| Commercial & industrial loans                                   |       | —                                     |       | — |   | — |   | — |   | — |   |
| Real estate construction loans                                      |       | —                                     |       | — |   | — |   | — |   | — |   |
| Real estate loans                                                   |       | —                                     |       | — |   | — |   | — |   | — |   |
| Consumer loans                                                      |       | —                                     |       | — |   | — |   | — |   | — |   |
| Total Loans Charged-Off                                             |       | —                                     |       | — |   | — |   | — |   | — |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| **Recoveries:**                                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Agricultural                                                        |       | —                                     |       | — |   | — |   | — |   | — |   |
| Commercial & industrial loans                                   |       | 53                                         |       | — |   | — |   | — |   | — |   |
| Real estate construction loans                                      |       | —                                     |       | — |   | — |   | — |   | — |   |
| Real estate loans                                                   |       | —                                     |       | — |   | — |   | — |   | — |   |
| Consumer loans                                                      |       | —                                     |       | — |   | — |   | — |   | — |   |
| Total Loans Recovered                                               |       | 53                                         |       | — |   | — |   | — |   | — |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Net loan charge  offs                                               |       | 53                                         |       | — |   | — |   | — |   | — |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Provision  charged to expense                                       |       | 771                                        |       | 1,069 |   | 764 |   | 602 |   | 220 |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Balance                                                             |       | $                                          | 5,430      |   | $ | 2,655 |   | $ | 1,586 |   | $ | 822 |   | $ | 220 |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Average gross  loans outstanding during period                      |       | $                                          | 308,411    |   | $ | 201,267 |   | $ | 122,454 |   | $ | 50,214 |   | $ | 8,318 |   |
| Gross loans  outstanding at end of period                           |       | $                                          | 463,858    |   | $ | 245,185 |   | 160,708 |   | $ | 82,671 |   | $ | 25,005 |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| **RATIOS**                                                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Charge-offs  to Average Loans (annualized)                      |       | n/a                                        |       | n/a |   | n/a |   | n/a |   | n/a |   |
| Allowance for  Loan Losses to Gross Loans at End of Period          |       | 1.17                                       | %          | 1.08 | % | 0.99 | % | 0.99 | % | 0.88 | % |
| Net Loan  Charge-offs to Allowance for Loan Losses at End of Period |       | n/a                                        |       | n/a |   | n/a |   | n/a |   | n/a |   |
| Net Loan Charge-offs to  Provision for Loan Losses                  |       | n/a                                        |       | n/a |   | n/a |   | n/a |   | n/a |   |

 

Appendix 8

----

 

**Appendix 9 - Allocation of the Allowance for LoanLosses**

The following table sets forth information concerning the allocation ofour allowance for loan losses by loan categories at the dates indicated.  The allowance for loan losses is availablefor offsetting credit losses in connection with any loan, but is internallyallocated to various loan categories as part of our process for evaluating the adequacyof the allowance for loan losses.
| ** **                             | ** ** | **As of December 31,  2006** | ** ** | **As of December 31,  2005** | ** ** | **As of December 31,  2004** | ** ** | **As of December 31,  2003** | ** ** | **As of December 31,  2002** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **Amount**                                  | ** ** | **% Total  Loans(1)**                  | ** ** | **Amount**                                  | ** ** | **% Total  Loans(1)**                  | ** ** | **Amount**                                  | ** ** | **% Total  Loans(1)** | ** ** | **Amount** | ** ** | **% Total  Loans(1)** | ** ** | **Amount** | ** ** | **% Total  Loans(1)** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)**        | ** ** |
| ** **                             |       |                                        |       |                                        |       |                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| USDA Agriculture  Loans                |       | $                                           | —     |                                        | 2.74       | %                                           | $          | —                                      |       | 5.52                                        | %          | $ | — |   | 10.43 | % | $ | — |   | 14.00 | % | $ | — |   | 0.00 | % |
| ** **                             |       |                                        |       |                                        |       |                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Commercial and  Industrial             |       |                                        |       |                                        |       |                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Revolving Lines of Credit              |       | 427                                         |       |                                        |       | 407                                         |       |                                        |       | 178                                         |       |   |   | 141 |   |   |   | 17 |   |   |   |
| Unseucred and Other Collateral         |       | 444                                         |       |                                        |       | 102                                         |       |                                        |       | 88                                          |       |   |   | 56 |   |   |   | 14 |   |   |   |
| Total Commercial Loans                 |       | 871                                         |       | 16.03                                       | %          | 509                                         |       | 15.67                                       | %          | 266                                         |       | 15.54 | % | 197 |   | 15.14 | % | 31 |   | 12.85 | % |
|                                   |       |                                        |       |                                        |       |                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Real Estate  Construction:             |       |                                        |       |                                        |       |                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition and Land                   |       | 1,711                                       |       |                                        |       | 361                                         |       |                                        |       | 98                                          |       |   |   | 46 |   |   |   | 21 |   |   |   |
| SFR, Commerical, Multi-family          |       | 1,379                                       |       |                                        |       | 663                                         |       |                                        |       | 293                                         |       |   |   | 177 |   |   |   | 73 |   |   |   |
| Government Guaranteed                  |       | 259                                         |       |                                        |       | 17                                          |       |                                        |       | 6                                           |       |   |   | 8 |   |   |   | 9 |   |   |   |
| Total Real Estate Construction Loans   |       | 3,349                                       |       | 33.15                                       | %          | 1,041                                       |       | 30.26                                       | %          | 397                                         |       | 20.79 | % | 231 |   |   |   | 103 |   |   |   |
|                                   |       |                                        |       |                                        |       |                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Real Estate Term:                      |       |                                        |       |                                        |       |                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Single Family Residences, Multi-family |       | 193                                         |       |                                        |       | 174                                         |       |                                        |       | 79                                          |       |   |   | 43 |   |   |   | 33 |   |   |   |
| Commercial                             |       | 1,003                                       |       |                                        |       | 897                                         |       |                                        |       | 649                                         |       |   |   | 241 |   |   |   | 39 |   |   |   |
| Total Real Estate Term Loans           |       | 1,196                                       |       | 46.36                                       | %          | 1,071                                       |       | 44.89                                       | %          | 728                                         |       | 45.02 | % | 284 |   |   |   | 72 |   |   |   |
|                                   |       |                                        |       |                                        |       |                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Total Real Estate                      |       | 4,545                                       |       | 79.51                                       | %          | 2,112                                       |       | 75.15                                       | %          | 1,125                                       |       | 65.80 | % | 515 |   | 63.42 | % | 175 |   | 83.26 | % |
|                                   |       |                                        |       |                                        |       |                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                        |       |                                        |       |                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Consumer loans                         |       | 13                                          |       | 1.72                                        | %          | 28                                          |       | 3.66                                        | %          | 191                                         |       | 8.23 | % | 109 |   | 7.43 | % | 10 |   | 3.89 | % |
| Unallocated                            |       | 1                                           |       | 0.00                                        | %          | 6                                           |       | 0.00                                        | %          | 4                                           |       | 0.00 | % | 1 |   | 0.00 | % | 4 |   | 0.00 | % |
|                                   |       | $                                           | 5,430      |                                        | 100.00     | %                                           | $          | 2,655                                       |       | 100.00                                      | %          | $ | 1,586 |   | 100.00 | % | $ | 822 |   | 100.00 | % | $ | 220 |   | 100.00 | % |

 

----

(1) Represents percentage of loans in category to total loans.

Appendix 9

----

 

**Appendix 10 - Premises and Equipment**

The followoingtable sets forth the cost and net book value of our fixed assets as of thedates indicated.
| ** **                         | ** ** | **As of December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                            | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **                         | ** ** | **Cost**                              | ** ** | **Depreciation** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Depreciation** | ** ** | **Value** | ** ** |
|                               |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Land                               |       | $                                     | 2,300      |   | $ | — |   | $ | 2,300 |   | $ | — |   | $ | — |   | $ | — |   |
| Buildings                          |       | 1,982                                 |       | 245 |   | 1,737 |   | — |   | — |   | — |   |
| Leasehold Improvements             |       | 1,746                                 |       | 587 |   | 1,159 |   | 1,620 |   | 344 |   | 1,276 |   |
| Furniture, Fixtures and  Equipment |       | 5,351                                 |       | 2,690 |   | 2,661 |   | 2,750 |   | 1,163 |   | 1,587 |   |
|                               |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| **Total**                          |       | $                                     | 11,379     |   | $ | 3,522 |   | $ | 7,857 |   | $ | 4,370 |   | $ | 1,507 |   | $ | 2,863 |   |

 

Appendix 10

----

 

**Appendix 11- Maturity Schedule of Time Certificates of Deposit**

At December 31, 2006, thescheduled maturities of time deposits including IRA’s (in thousands) are asfollows:
|                      | ** ** | **Under** | ** ** | **Over** | ** ** | ** ** | ** ** |
|----------------------|------------|-----------|------------|----------|------------|------------|------------|
| ** **           | ** ** | **100K**  | ** ** | **100K** | ** ** | **Total**  | ** ** |
| During the Year  of: |       |      |       |     |       |       |       |
| 2007                 |       | $         | 106,877    |     | $          | 62,423     |       | $ | 169,300 |   |
| 2008                 |       | 36,464    |       | 1,878    |       | 38,342     |       |
| 2009                 |       | 16,421    |       | 824      |       | 17,245     |       |
| 2010                 |       | 902       |       | 1,156    |       | 2,058      |       |
| 2011                 |       | 204       |       | 305      |       | 509        |       |
| **Total**            |       | $         | 160,868    |     | $          | 66,586     |       | $ | 227,454 |   |

 

Appendix 11

----

**Appendix 12 - Other Borrowed Funds**

The followingtable sets forth the FHLB advances and other borrowing
| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(dollars in thousands)**  | ** ** |
|                                             |       |                                  |       |   |   |   |   |
| **Overnight FHLB Advances**                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                             |       |                                  |       |   |   |   |   |
| Balance at December 31,                          |       | $                                     | 31,000     |   | $ | 0 |   | $ | 30,500 |   |
| Average amount  outstanding                      |       | 24,599                                |       | 15,747 |   | 9,403 |   |
| Maximum amount  outstanding at any month end     |       | 54,000                                |       | 35,000 |   | 30,500 |   |
| Average interest rate  for the year              |       | 4.30                                  | %          | 3.11 | % | 2.19 | % |
|                                             |       |                                  |       |   |   |   |   |
| **Term FHLB Advances ***                         | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                             |       |                                  |       |   |   |   |   |
| Balance at December 31,                          |       | $                                     | 8,000      |   | $ | 0 |   | $ | 0 |   |
| Average amount  outstanding for the short period |       | 8,205                                 |       | 0 |   | 0 |   |
| Maximum amount  outstanding at any month end     |       | 8,500                                 |       | 0 |   | 0 |   |
| Average interest rate  for the short period      |       | 4.09                                  | %          | 0.00 | % | 0.00 | % |

 

----

* Acquired inmerger on 11/06/06

 
| **Subordinated Debt +**                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                         |       |       |       |       |       |       |       |
| Balance at December 31,                      |       | $          | 20,619     |       | $          | 15,464     |       | $ | 0 |   |
| Average amount  outstanding                  |       | 16,255     |       | 2,457      |       | 0          |       |
| Maximum amount  outstanding at any month end |       | 20,619     |       | 15,464     |       | 0          |       |
| Average interest rate  for the year          |       | 6.34       | %          | 5.79       | %          | 0.00       | %          |
|                                              |            |            |            |            |            |            |            |  |  |  |

----

+ $5.2 millionacquired in merger on 11/06/06

 
| **Notes  Payable**                          |   |   |   |   |   |   |   |
|---------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                        |   |   |   |   |   |   |   |
| Balance at  December 31,                    |   | $      | 530    |   | $      | 0      |   | $ | 0 |   |
| Average amount  outstanding                 |   | 429    |   | 0      |   | 0      |   |
| Maximum amount outstanding at any month end |   | 717    |   | 0      |   | 0      |   |
| Average interest rate  for the year         |   | 8.16   | %      | 0.00   | %      | 0.00   | %      |
|                                             |        |        |        |        |        |        |        |  |  |  |

 

Appendix 12

----

 

**Appendix 13- Estimated Net Interest Income SensitivityProfile**

The following table sets forth the estimated effects on the Bank’s netinterest income over a 12 month period following December 31, 2006 in the eventof an immediate change up or down in the indicated market interest rates.
|                                      | ** ** | **Change in**    | ** ** | ** **     | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                           | ** ** | **Net Interest** | ** ** | **Percentage** | ** ** |
| **(Dollars in thousands)** | ** ** | **Income**            | ** ** | **Change**     | ** ** |
| Scenario                             |       |                  |       |           |       |
|                                 |       |                  |       |           |       |
| Up 200 basis points                  |       | $                     | 1,402      |           | 10.89      | % |
| Up 100 basis points                  |       | $                     | 728        |           | 5.65       | % |
| Down 100 basis points                |       | $                     | (955       | )              | -7.42      | % |
| Down 200 basis  points               |       | $                     | (2,428     | )              | -18.86     | % |

 

Appendix 13

----

 

**Appendix 14 - Interest Rate Sensitivity Gap**

The followingtable sets forth the Company’s interest rate sensitivity.  Interest rate sensitivity is measured as the differencebetween the volumes of assets and liabilities subject to repricing at varioustime periods.
| ** **                                                              | ** ** | **Within** | ** ** | **Three**          | ** ** | **One Year**   | ** ** | ** **          | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|------------|------------|
| ** **                                                              | ** ** | **Three**  | ** ** | **Months to** | ** ** | **to**              | ** ** | **After**           | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Months** | ** ** | **One Year**  | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
|                                                                    |       |       |       |               |       |                |       |                |       |       |       |
| **Interest  Earning Assets:**                                           | ** ** | ** ** | ** ** | ** **         | ** ** | ** **          | ** ** | ** **          | ** ** | ** ** | ** ** |
| Interest bearning cash and due from banks                               |       | $          | 13,290     |               | $          | —              |       | $                   | —     |       | $          | — |   | $ | 13,290 |   |
| Federal funds sold and short term investments                           |       | 6,616      |       | —             |       | —              |       | —              |       | 6,616      |       |
| Investment securities                                                   |       | 8,051      |       | 17,148             |       | 47,664              |       | 20,064              |       | 92,927     |       |
| Loans                                                                   |       | 262,228    |       | 24,792             |       | 25,993              |       | 150,846             |       | 463,859    |       |
|                                                                    |       |       |       |               |       |                |       |                |       |       |       |
| **Total**                                                               |       | $          | 290,185    |               | $          | 41,940              |       | $                   | 73,657     |       | $          | 170,910 |   | $ | 576,692 |   |
|                                                                    |       |       |       |               |       |                |       |                |       |       |       |
| **Interest  Bearing Liabilities:**                                      | ** ** | ** ** | ** ** | ** **         | ** ** | ** **          | ** ** | ** **          | ** ** | ** ** | ** ** |
| Interest bearing demand deposits                                        |       | $          | 10,921     |               | $          | —              |       | $                   | —     |       | $          | — |   | $ | 10,921 |   |
| Savings deposits                                                        |       | 77,767     |       | —             |       | —              |       | —              |       | 77,767     |       |
| MMDA’s                                                             |       | 107,107    |       | —             |       | —              |       | —              |       | 107,107    |       |
| Time deposits less than $100,000                                        |       | 51,976     |       | 55,003             |       | 53,991              |       | —              |       | 160,970    |       |
| Time deposits of $100,000 or more                                       |       | 39,782     |       | 22,965             |       | 3,737               |       | —              |       | 66,484     |       |
| Borrowed funds                                                          |       | 30,765     |       | 1,265              |       | 7,000               |       | 20,619              |       | 59,649     |       |
|                                                                    |       |       |       |               |       |                |       |                |       |       |       |
| **Total**                                                               |       | $          | 318,318    |               | $          | 79,233              |       | $                   | 64,728     |       | $          | 20,619 |   | $ | 482,898 |   |
|                                                                    |       |       |       |               |       |                |       |                |       |       |       |
| Interest Rate  Sensitivity Gap                                          |       | $          | (28,133    | )                  | $          | (37,293             | )          | $                   | 8,929      |       | $          | 150,291 |   | $ | 93,794 |   |
|                                                                    |       |       |       |               |       |                |       |                |       |       |       |
| Cumulative  Interest Rate Sensitivity Gap                               |       | $          | (28,133    | )                  | $          | (65,426             | )          | $                   | (56,497    | )          | $          | 93,794 |   |   |   |
|                                                                    |       |       |       |               |       |                |       |                |       |       |       |
| Cumulative  Interest Rate Sensitivity Gap/Total Interest Earning Assets |       | -4.89      | %          | -11.38             | %          | -9.83               | %          | 16.31               | %          |       |       |
|                                                                    |       |       |       |               |       |                |       |                |       |       |       |
| Cumulative Gap  as a% of Total Assets                                   |       | -4.32      | %          | -10.04             | %          | -8.67               | %          | 14.39               | %          |       |       |

 

Appendix 14

----

 

**Appendix 15 - Capital Adequacy - Risk-based Ratios**
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                            | ** ** | **Minimum to** | ** ** |
|-----------------------------------------|------------|------------|------------|-----------------|------------|----------------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**                | ** ** | **be Well Capitalized**     | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **      | ** ** | **Capital**                | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                              | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**    | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**                 | ** ** | **Ratio**                             | ** ** | **Amount**          | ** ** | **Ratio** | ** ** |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **December  31, 2006**                  | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| Total Capital to  Risk Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                       |       | $          | 67,001     |            | 12.98      | %                          | $          | 41,527                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security Bank                    |       | $          | 53,084     |            | 10.74      | %                          | $          | 39,545                                |       | 8.00                | %          | $ | 49,431 |   | 10.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital  to Risk Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                       |       | $          | 51,431     |            | 9.97       | %                          | $          | 20,763                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                    |       | $          | 47,310     |            | 9.57       | %                          | $          | 17,372                                |       | 4.00                | %          | 29,659 |   | 6.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital  to Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                       |       | $          | 51,431     |            | 9.85       | %                          | $          | 22,221                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                    |       | $          | 47,310     |            | 8.04       | %                          | $          | 19,973                                |       | 4.00                | %          | $ | 26,240 |   | 5.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **December  31, 2005**                  | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| Total Capital to  Risk Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                       |       | $          | 46,183     |            | 16.53      | %                          | $          | 22,345                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security Bank                    |       | $          | 32,883     |            | 12.51      | %                          | $          | 21,026                                |       | 8.00                | %          | $ | 26,282 |   | 10.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital  to Risk Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                       |       | $          | 37,557     |            | 13.45      | %                          | $          | 11,172                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                    |       | $          | 30,003     |            | 11.42      | %                          | $          | 10,513                                |       | 4.00                | %          | 15,769 |   | 6.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital  to Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                       |       | $          | 37,557     |            | 10.06      | %                          | $          | 14,929                                |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                    |       | $          | 30,003     |            | 8.96       | %                          | $          | 13,400                                |       | 4.00                | %          | $ | 16,750 |   | 5.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| **December  31, 2004**                  | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                            | ** ** | ** **          | ** ** | ** ** | ** ** |
| Total Capital to  Risk Weighted Assets  |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                       |       | $          | 28,978     |            | 17.26      | %                          | $          | 13,434                                |       | 8.00                | %          | NA |   | NA |   |
| Nevada Security Bank                    |       | $          | 25,940     |            | 15.60      | %                          | $          | 13,303                                |       | 8.00                | %          | $ | 16,629 |   | 10.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital  to Risk Weighted Assets |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                       |       | $          | 27,321     |            | 16.22      | %                          | $          | 6,717                                 |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security Bank                    |       | $          | 24,193     |            | 14.55      | %                          | $          | 6,652                                 |       | 4.00                | %          | 9,978 |   | 6.00 | % |
|                                    |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| Tier 1 Capital  to Average Assets       |       |       |       |            |       |                       |       |                                  |       |                |       |   |   |
| The Bank Holdings                       |       | $          | 27,321     |            | 11.01      | %                          | $          | 9,893                                 |       | 4.00                | %          | NA |   | NA |   |
| Nevada Security  Bank                   |       | $          | 24,193     |            | 9.91       | %                          | $          | 9,768                                 |       | 4.00                | %          | $ | 12,211 |   | 5.00 | % |

 

Appendix 15

----